Commentaries

Now raising intellectual capital

from Rolfe Winkler:

Why not Baby Banks?

The President is right to target firm size if he wants to insure no financial firm can cause a system failure. Yet despite clear evidence that banks are already too big, Obama's proposal won't cut them down. It would only limit future growth by acquisition.

Specifics are being worked out, but what is clear is that Paul Volcker’s “size” proposal will limit future growth by acquisition only. It won’t force existing firms to shrink nor limit their ability to grow organically.

But if Obama wants to end the too-big-to-fail paradigm, if he wants to eliminate the possibility that one firm’s failure could cause a cascading financial collapse, he needs to engineer a system with more circuit breakers. Shrinking banks is crucial.

Like the power grid, the financial system is huge, dynamically complex and interconnected. A single point of failure can cause a cascading collapse. In 2003, some overgrown trees in Ohio were enough to cause a blackout that hit 55 million from Ontario to New York. In 2008, the failure of any one of a handful of financial firms could have plunged the economy into Depression.

from Rolfe Winkler:

The Ascent of Volcker

So, wow, the Obama administration has reacted very quickly -- perhaps too quickly -- post the Massachusetts Senate election. After proposing a tax on bank liabilities, Obama is taking an even tougher line, adopting recommendations from Paul Volcker that banks be limited in their size and scope.

Before getting to specifics, it's worth noting how Geithner and Summers appear to have lost favor. In the preamble to the proposal, Obama mentions neither of them. And when he announced the plan he did so with Volcker and Bill Donaldson standing behind him...Geithner and Summers were off to the side. Could the duo be headed for the exit?

from Rolfe Winkler:

Does Volcker give the Fed too much credit?

Paul Volcker's speech to the Economic Club of NY last week (pdf) was generally reported as the latest example of the former Fed Chairman calling for more substantive financial system reform. He did repeat those points, but the focus of his speech was about the importance of the Fed maintaining its regulatory and supervisory authority over the banking system. At a certain point, this seems the stuff of absurdist theater. If the Fed never intends to use its regulatory authority, why insist the authority be maintained?

The problem with his speech is that while he acknowledges the Fed is badly staffed -- mostly with economists/mathematicians, few from business/banking -- he doesn't address the clear failure on the part of the FOMC to 1) grapple with bubbles nor 2) to get serious about sensible reforms. He bemoans "reform light," but that is precisely what the Fed is delivering.

from Rolfe Winkler:

Lunchtime Links 1-15

Consumer protection agency in doubt (Paletta, WSJ) Chris Dodd appears willing to trade the CFPA in exchange for Republican support of his financial reform bill.

Manhattan apt rents drop 9.4% in Q4 (Gittelsohn, Bloomberg) Great stimulus for the NY economy.

  •