Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktWhat if European banks crumble? Do we have the strength to deal with the repercussions? Probably not, says Simon Johnson.
First, the resolution authority under Dodd-Frank is purely domestic — there is no cross-border dimension.
Second, it has never been clear that any government agency would be willing to use such resolution powers preemptively — before losses grow so large that they threaten to rock the macroeconomy.
Third, who would lose money in any potential liquidation? The fundamental premise of the resolution authority is that some creditors could face losses, but they would be imposed in an orderly and predictable manner to avoid undermining confidence and destabilizing the financial system. Any such thinking today seems far-fetched.
Good bedtime read and fodder for our resident banker!
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All Things in Moderation 
That was certainly discouraging mark. You think OWS is a problem now, wait until some Federal official decides we need to do another bailout. People from both the left and the right will revolt I think.It's funny because Scott and I were discussing the financial collapse and TARP just the other day and while I don't normally enjoy arguing economics with someone with more intimate knowledge of the banking sector, I was surprised that he wasn't bothered by the Audit the Fed Report. At least the part that outlined the $16T we loaned to both foreign and domestic banks to keep them afloat last time.Sure it's short term and overnight stuff but someone explain to me why they got preferential treatment and the American people still suffer the consequences. It doesn't feel like a free market principle to me. And apparently, we haven't learned anything since the banks have essentially been writing the new rules anyway and they don't appear much more solvent now than they did then.
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Given the painfully slow pace at which the European debt crisis is unfolding, have markets, banks and U.S. banks in particular, factored in a Greek default or something approaching default and an Italian default as well?
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"…have markets, banks and U.S. banks in particular, factored in a Greek default…"I would guess as to Greece alone, "Yes".
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lms:I was surprised that he wasn't bothered by the Audit the Fed Report. At least the part that outlined the $16T we loaned to both foreign and domestic banks to keep them afloat last time.It's not that I wasn't bothered by it. Most government intrusion into the markets bothers me to some extent. It's just that it wasn't that relevant to the discussion we were having. As I said, it is not clear to me that the lending came at anyone's "expense". And, again as I said, the $16T figure is highly deceptive. It is not as though there was ever $16T at risk. The loans were all overnight loans, and $16T was the cumulative total of these 1-day loans over the course of something like two years. It's just not a very meaningful number. I'm susrprised you continue to cite the number as if it is meaningful.
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This is an interesting quote from one of the economists I enjoy reading, Steve Waldman. He revisits TARP which may be something we should look at again, just in case. The piece is in response to a post Ezra Klein published, last week I think, that received quite a bit of attention.Once you understand that the problem is a fairness issue rather than a dollars-and-cents issue, the policy space grows wider. Holding constant the level of expenditure, one can make bail-outs more or less fair by the degree to which you demand sacrifice from the people you are bailing out. TARP was deeply stupid not because it meant socializing risks and costs created by bankers. TARP was terrible public policy because it socialized risks and costs while demanding almost no sacrifice at all from the people most responsible for those risks. The alternative to TARP was never “let the banks fail, and see how the bankruptcy system deals with it.” The alternative would have been to inject public capital (socialize risks and costs!) while also haircutting creditors, writing-off equityholders, firing management, and aggressively investigating past behavior. It was not the money that made TARP unpopular. It was the unfairness. And the unfairness was not at all necessary to resolve the financial problem.If the Obama administration, or any administration, decided to encourage principal writedowns by having the government simply cover half the loss, that would be unfair. The Rick Santellis of the world might object more than I would, but that would be to my discredit more than theirs. Fairness should never be a policy afterthought. Widely adhered norms of fair play are among the most valuable public goods a society can hold. A large part of why the financial crisis has been so corrosive is that people understand that major financial institutions violated these norms and got away with it, which leaves all of us uncertain about what our own standards of behavior should be and what we can reasonably expect from others. When policy wonks, however well meaning, treat fairness as a public relations matter, they are corroding social infrastructure that is more important than the particular problems they mean to fix.
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scottI apologize for harping on the $16T but I think it's important to understand the amount of support the banks both needed and used during the crisis. Here's a pretty decent Bloomberg piece that details some of the risks we've now institutionalized because of our behind the scenes propping up of the banks. It's just one aspect in a larger framework that indicates the "free" market, in banking at least, doesn't seem to exist.Herring, the University of Pennsylvania professor, said some banks may have used the program to maximize profits by borrowing “from the cheapest source, because this was supposed to be secret and never revealed.”Whether banks needed the Fed’s money for survival or used it because it offered advantageous rates, the central bank’s lender-of-last-resort role amounts to a free insurance policy for banks guaranteeing the arrival of funds in a disaster, Herring said.An IMF report last October said regulators should consider charging banks for the right to access central bank funds.“The extent of official intervention is clear evidence that systemic liquidity risks were under-recognized and mispriced by both the private and public sectors,” the IMF said in a separate report in April.Access to Fed backup support “leads you to subject yourself to greater risks,” Herring said. “If it’s not there, you’re not going to take the risks that would put you in trouble and require you to have access to that kind of funding.”
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European governments have a long history of bailing out their banks because they all want to maintain their national champions. To some extent there is still a lot of denial – Dexia trades with a market cap of 1.6 billion euros and it probably is a zero. I think the sovereign debt exposure for the US is primarily in the shorter end of the curve, and any resolution will be more centered on maturity extension than principle reduction. I could be wrong, but I think the US banks don't have a lot of direct exposure, but the could conceivably have indirect exposure through OTC derivatives to the big Euro banks. That probably won't be an issue unless Italy becomes one.FWIW, CDS levels: SocGen 634 bp, BNP 517 bp Credit Agricole 513 bp, Intesa 665 bp.
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Thanks Brent (sold2u), I hope you're correct about our exposure. Isn't there some concern re money market funds or is that just a minor issue? And I'm sorry I don't understand how to interpret those CDS levels.BTW, welcome to our little group, we hope it grows.
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Wouldn't the banks eventually have to be allowed to fail (there are many of left and right that support this position, and I expect they'd only be noisier and more problematic, next time around)? Or wouldn't any future bailout have to come attached to a trust-busting style breakup of the banks so they could no longer be "too big to fail" . . . and so such a failure could be managed? Plus, some policy of administrative ejection. Having the same folks in charge of the bank after it gets bailed out that were in charge before seems . . . inadvisable, to me.
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Thanks, lms. I tried to change my profile name to the one everyone recognizes (sold2u), but blogger seems to change it globally, and I want to use my real name on my other blog. So I am not sure I can change it to my WaPo identity.
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That's okay, I just wanted everyone to know who you were.
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"That's okay, I just wanted everyone to know who you were. "Can he change his avatar to Thurston Howell, III?
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