Last week I took note of the views of the CEO of JPMorgan on the state of the financial sector and I must say it didn’t comport too closely with what I see around me or with the way actual people, politicians, and the federal government behave. Sort of like Alice’s visit to Wonderland.
This week Neel Kashkari, chairman of the Minneapolis Federal Reserve Bank, has responded to Mr. Dimon and I’m pleased to say that in his piece on the Minneapolis Fed’s site through the mist I see the contours of something that looks a bit more like the world as I see it. I recommend that you read it in full but this is the most telling sentence:
Unfortunately, regulators have taken it easy on the large banks, which today have only about half of the equity they need.
It doesn’t matter what laws are in place. It doesn’t even matter what consumers or regulators do. All that matters is what bankers do and how our politicians will respond to what bankers do and, simply put, they will act consistently with the incentives in place.
If we want to avoid future financial crises and federal bailouts of the largest, richest banks in the world, there are only a few alternatives at hand:
- Require banks to hold much higher reserves. How much higher? Think 10% to 20% rather than today’s 3% (or, in practice, 1%).
- Make branch banking illegal again. That inherently regulates how big a bank can get and small banks are much less attractive targets for bailouts.
- Get an entirely new set of politicians and term limit them severely.
We should also prohibit elected officials, appointees, and regulators from taking jobs with banks for a period of ten years after leaving office. That could be done through the tax code.
Or, alternatively, we could accustom ourselves to financial crises of increasing severity and frequency with attendant bailouts.
Adding to your proposed list:
4) Ban contracting in LIBOR
5) All loans issued must be held on the issuing bank’s balance sheet until repaid
6) Ban acceptance of financial assets as collateral.
7) Ban banks from buying credit default swaps
8) Ban lending off-shore.
9) Ban proprietary trading by commercial banks.
I honestly don’t know how they avoid a conflict of interest as long as commercial banks engage in proprietary trading.
My concern is that even if we go whole hog and insist that banks just be banks regulation will continue to be tentative and phlegmatic and we’ll still bail ’em out if they get into trouble, of their own making or not.
Too big to fail is too big to exist.
“Unfortunately, regulators have taken it easy on the large banks, which today have only about half of the equity they need.”
I recall, I suppose 7-8 years ago, you (and me) commenting that the arbitrage the Fed was making available to banks as just being a giant reserve building scam.
Bens #5 is completely unworkable. Stuffee banks can’t underwrite past the old fashioned character loan.
I don’t care if Jamie Dimon makes $20 million a year and Michael Corbat $16 million a year. I really don’t.
I do care if they make double digit millions a year and they’re backstopped by the federal government. No risk means definitionally you’re not an entrepeneur. If they’re government employees they should be paid like government employees.
Drew,
The purpose of a commercial chartered bank is to make loans the old fashioned way. There is no argument for allowing them to engage in anything else and if they don’t like the pay that role brings they shouldn’t be in banking. There is no social gain from selling debt but there’s a big personal gain for the person doing the selling.
Fuck him.
Make them hold much higher reserves. You need big, blunt rules that are difficult for them to finesse. Ideally, you also find some way to put the bankers themselves at risk because right now it is only the banks which bear some risk, and they don’t hold that much either. Making them all partnerships would be ideal, instead of corporations, so that they would have their own assets at risk, but they hold way too much power for that to happen now.