I offered a chat at the Minneapolis Fed’s “Ending Too Big to Fail” symposium, May 16. Agenda and video of the function here. My talk is based on “towards a run-free financial system,” and a little on a fresh structure for federal debt, and blog visitors shall notice many recycled ideas. But it incorporates some current thinking both on substance and on marketing — the proposal is so simple, a lot of the work is on meeting objections. Here’s my talk. That is also available as a pdf here.

We have to establish what “sytstemic” and “crisis” indicate before we can make an effort to fix them. My idea is that, at its primary, our financial crisis was a systemic run. The mechanism is familiar from Diamond and Dybvig, and especially Gary Gorton’s description of how “information-insensitive” possessions suddenly lose that property and become illiquid. You see a nagging problem at a bank – a word I am going to use loosely to add shadow-banks, overnight debt, and other intermediaries. You question, what about my bank? You don’t really know. The point of short-term debts is that you don’t pay attention to the bank or investment company’s property generally.

But you also have the to take your money out anytime, and the last one out gets the rotten egg. When uncertain, you might as well forego a few basis sights and get out now. Everyone does this, and the bank fails. Runs at specific organizations, caused by identifiable problems, aren’t really a risk.

My story includes a specific “contagion,” that troubles at one institution spread to another, because they cause people to wonder about the other bank’s resources. That “systemic run” component means that banking institutions can’t’ easily sell possessions to improve cash or issue new equity. It’s not just a string of dominoes: A fails, B loses money, B falls, and so forth, so by conserving the whole system is preserved. Contrariwise, even conserving A is not enough to make sure traders that B’s possessions are okay.

In fact, saving A might verify investor’s concerns about B’s property, and set off a run! It’s not huge losses on unsafe resources particularly. Bank assets are not that risky. Bank or investment company liabilities are delicate. Small losses spark large runs. Our crisis and recession were not the result of specific business functions failing.

  1. Purports to earn income for the investors
  2. Immigrants to Canada who’ve retained foreign assets
  3. Increase tourism
  4. English-Indonesian Indonesian-English
  5. 7 years ago from United States

Failure is failure to pay creditors, not just a dark opening where there was previously a business. Operations keep going in bankruptcy. The ATMs did not go dark. In my premises, the 2000-currency market’s bust was not a crisis, because it was not a run. Yes, there were huge losses. But when stocks plunge, all you can do is go home, pour a drink, yell at your dog, and bemoan your dumb decisions.

You can’t demand your money back from the issuing company, so you can’t drive the business to bankruptcy if it generally does not pay. Panic selling, if “irrational even,” even if it causes “herding” by others, even if it drives prices down, is not a crisis, and it’s not a run, because the issuing company doesn’t want to do anything about any of it. If you want to stop crises, we must describe when we will say “good enough” and stop trying to fix things in the name of turmoil prevention.

My idea: an overall economy with booms and busts, risks taken, and deficits transparently utilized by falling prices, is wonderful for now enough. If we try to create an economic climate in which nobody ever loses money, we will just create something in which nobody ever takes any risk and will not fund any remotely risky investment opportunity.

That is the path we ‘re going. I really do not imply that other financial rules are definitely not bad, or even that one shouldn’t contemplate plans to reduce stock-market volatility. But if we actually want to fix crises, or end TBTF, we must separate those other methods into everyday regulation.

Given these premises, the central weakness in the economic climate is clear: delicate, run-prone liabilities. The caveats here exempt bills, receivables, trade credit, etc, which are fixed value but not run-prone. “Funding” is the key qualifier. Banks and shadow banks must get the money they use to hold risky and possibly illiquid loans and securities overwhelmingly from run-proof, floating-value property – common collateral mostly, some long-term debt.