Comments on: Shrinking banks

By: Daniel Hess

Daniel Hess — Thu, 27 Aug 2009 06:50:30 +0000

Felix –

Your oft-repeated thesis that “it wasn’t an excess of greed and speculation which led to the financial crisis, but rather an excess of overcaution, with an attendant surge in demand for triple-A-rated bonds” deserves an award as one of the best insights of our time.

It seems to me that a large part of this ‘overcaution’ is really due to central banks, sovereign funds, insurance and pension funds, and other large pools that have a very limited mandate as to how they can invest. These large pools and their limited mandates haven’t changed much at all through this crisis.

Meanwhile, the big reliable AAA credit remaining is sovereign debt, now available in abundance. If in our brave new world, non-economic bond players are the planets that control the tides, then bond vigilantism may be out of the picture. In the present case, central banks are not getting good market signals. Instead of a healthy rise in yields when too much stimulus is given, they are getting no response. At some point in the not-so-distant future, it will be suddenly found that the non-economic bond buyers simply have insufficient funds to meet the supply of bonds offered by central banks. Sovereign bond offerings may simply fail. Interest rates may spike more sharply than we have ever seen and we will wonder, where was the market signal?

Looking at global sovereign debt loaded into the budgetary pipeline, this spike event may not be far off, it will be global, and then what will the banks do?

By: Joe P

Joe P — Thu, 27 Aug 2009 01:09:43 +0000

One non deal makes the difference between globalization and deglobalization? Redunkulous.

If the Koreans had bought Lehman, that would have merely delayed the crisis of highly leveraged, speculative institutions, but how in the world could the deal have prevented it? That buys the bullshit that it was a liquidity issue.

By: Felix Salmon

Felix Salmon — Wed, 26 Aug 2009 21:36:49 +0000

DaveS, no, there was no written presentation that I know of, although it can’t hurt to email him to ask for a copy of his notes.

ab, yes, loans have stricter underwriting than bonds. They also have covenants.

And Shah/jg/Mark, yes, I was trying to pay a compliment to the Canadian banks. Boring is what every bank wants to be, these days.

By: Mark Beauchamp

Mark Beauchamp — Wed, 26 Aug 2009 20:33:40 +0000

@Shah

“Boring”, as I understand Felix, isn’t used in a pejorative sense here.

By: jg

jg — Wed, 26 Aug 2009 20:12:24 +0000

Speaking of Canadian Banks, there's a post and a paper over at VoXEU that I think is a must read. I think it relates very well to your point about banks having to become "boring". In other words, for the sake of stability, banks will need to rely more on simple deposits, instead of exotic finance. I guess that's the old 3-6-3 model.

By: the Shah

the Shah — Wed, 26 Aug 2009 19:59:21 +0000

Once again we get a left-handed compliment to the Canadian banks. Is it really so painful for Americans to admit that Canadian banks are exceptionally solid performers? Each of the ‘Big Six’ was earning between $1-2b per quarter, and is now still earning between $500m-1b per quarter. They each have a market-cap between $40-50b. We had only one quarter with bank losses form all this worldwide meltdown, and they were in the low hundred millions. So, we are smaller, manage to create stable and sustainable strong profits, and the best you can say is boring? How about saying “It’s the way banking should be, instead of robbing people and government blind with voodoo accounting and mislabelling securities!”

By: RH Pyle

RH Pyle — Wed, 26 Aug 2009 19:59:18 +0000

I didn’t buy more than I can afford. The consequence was of course owning very little. No house,, used car,, shabby furnishings. My method would have worked had not the banks, government and employers conspired to keep me paying out every nickel I made. Between the supression of wages, the banks charging shameful fees to have access to my own money and a government which treats working men and women like sources of income. (much like livestock) How is the typical American expected to prop up these edifices of excess without any hope of being allowed inside?

By: ab

ab — Wed, 26 Aug 2009 19:42:58 +0000

I’m also curious about your push for loans over bonds. What’s the big benefit there?

Is it simply the fact that loans are less liquid and held mainly by underwriters (encouraging more stringent underwriting)?

By: Mark Beauchamp

Mark Beauchamp — Wed, 26 Aug 2009 19:36:32 +0000

You just shifted a couple of loosely held paradigms in my head.

“…it wasn’t an excess of greed and speculation which led to the financial crisis, but rather an excess of overcaution with an attendant surge in demand for triple-A-rated bonds”

…which might not have been as high a demand had they been labeled “toxic-salami-from-Hell bonds”.

By: dvictr

dvictr — Wed, 26 Aug 2009 19:09:53 +0000

“encourage that credit to be in the form of loans rather than bonds.”
-umm.. im guessing this has something to do with short term borrowing vs long term financing /fixed vs floating idk??

“move in general from a world of debt finance to a world of equity finance”
-0% interest rates don’t help your cause much

“abolish the tax-deductibility of interest”
-what is it with you and your love for tax revenue?

By: DaveS

DaveS — Wed, 26 Aug 2009 19:04:56 +0000

Felix, is there a way to get a copy of Prof. James’s presentation, like a conference website or something?

By: Chris

Chris — Wed, 26 Aug 2009 18:51:08 +0000

I like the idea of eliminating bonds and moving towards loans.

However, how would this differ from Japan’s financial system of 90′s, which also caused a giant real estate bubble?