After reading the comments at the Wall Street Journal (some in response to
my earlier post), and listening to various commentators on the boob tube today,
I have some additional thoughts. Many of the responses to the president's
proposals (and my original comments) have been along the lines of we need
to fix the things that caused our current state of affairs -- they then go on to
point out how many of the elements of the president's plan do not correctly
address this or that participant; or this or that situation that contributed to
the current mess. Many of the pundits have correctly pointed out that the Obama
team is in fact making two proposals: one to put a "firewall" between "risky"
activities, and those with little risk; the other is to attempt to limit the
size of "big" Banks. The Obama administration apparently is of the opinion that
the "too big to fail" issue is a problem (that needs to be addressed/prevented)
rather than an unavoidable fact of life in the financial world of
21st-century.
Whether an activity contributed to the current financial
disarray or not, the essential policy issue here is whether we have effective
regulatory mechanisms in place to deal with systemic risk. As I stated in my
earlier post I am broadly in agreement with the attempt to segregate "risky"
activities from non-risky ones (and that would be in all financial
intermediaries whether classified as a bank or not; and "all" risky financial
transactions -- no matter who originates them -- a lot of commentary on the
financial TV channels was spent discussing abstruse things such as SIVs). We
need to foster going forward two kinds of financial intermediaries: those with
the appetite for, and the ability to manage, risk; and those who engage in more
mundane, less risky retail banking activities. I believe these two kinds of
entities need to be kept separate: one, because (in the past) internal "Chinese
wall" approaches have not worked very well, and two, because at base this is
mainly an issue of "corporate culture". You cannot create an entity (I believe)
that can accommodate at the same time pro-risk and anti-risk cultures within a
single organization.
On the other hand I find the proposal to limit the
size of "big" Banks distasteful, and wrong-headed. In the globalized world in
which we live, large financial intermediaries are a fact of life, and if we wish
to remain globally competitive (and to keep a sizable fraction of financial
services jobs in the US), then we must have entities of sufficient size and
expertise to compete on the global playing fields. We have already seen the
deleterious effects of Sarbanes-Oxley in the migration of parts of the financial
services industry to places like Hong Kong and London. In the 80s and 90s New
York was the financial center of the universe; today that is no longer the case.
If we attempt to limit the size of large investment banks, New York will be
relegated to becoming a financial backwater. "Too big to fail" is not something
that needs to be "fixed". Rather, it is an unavoidable consequence of the
globalized economy, and we should -- as a matter of public policy -- figure out
rational ways of handling the situation when a "too big to fail" entity gets
into trouble.
my earlier post), and listening to various commentators on the boob tube today,
I have some additional thoughts. Many of the responses to the president's
proposals (and my original comments) have been along the lines of we need
to fix the things that caused our current state of affairs -- they then go on to
point out how many of the elements of the president's plan do not correctly
address this or that participant; or this or that situation that contributed to
the current mess. Many of the pundits have correctly pointed out that the Obama
team is in fact making two proposals: one to put a "firewall" between "risky"
activities, and those with little risk; the other is to attempt to limit the
size of "big" Banks. The Obama administration apparently is of the opinion that
the "too big to fail" issue is a problem (that needs to be addressed/prevented)
rather than an unavoidable fact of life in the financial world of
21st-century.
Whether an activity contributed to the current financial
disarray or not, the essential policy issue here is whether we have effective
regulatory mechanisms in place to deal with systemic risk. As I stated in my
earlier post I am broadly in agreement with the attempt to segregate "risky"
activities from non-risky ones (and that would be in all financial
intermediaries whether classified as a bank or not; and "all" risky financial
transactions -- no matter who originates them -- a lot of commentary on the
financial TV channels was spent discussing abstruse things such as SIVs). We
need to foster going forward two kinds of financial intermediaries: those with
the appetite for, and the ability to manage, risk; and those who engage in more
mundane, less risky retail banking activities. I believe these two kinds of
entities need to be kept separate: one, because (in the past) internal "Chinese
wall" approaches have not worked very well, and two, because at base this is
mainly an issue of "corporate culture". You cannot create an entity (I believe)
that can accommodate at the same time pro-risk and anti-risk cultures within a
single organization.
On the other hand I find the proposal to limit the
size of "big" Banks distasteful, and wrong-headed. In the globalized world in
which we live, large financial intermediaries are a fact of life, and if we wish
to remain globally competitive (and to keep a sizable fraction of financial
services jobs in the US), then we must have entities of sufficient size and
expertise to compete on the global playing fields. We have already seen the
deleterious effects of Sarbanes-Oxley in the migration of parts of the financial
services industry to places like Hong Kong and London. In the 80s and 90s New
York was the financial center of the universe; today that is no longer the case.
If we attempt to limit the size of large investment banks, New York will be
relegated to becoming a financial backwater. "Too big to fail" is not something
that needs to be "fixed". Rather, it is an unavoidable consequence of the
globalized economy, and we should -- as a matter of public policy -- figure out
rational ways of handling the situation when a "too big to fail" entity gets
into trouble.
Cheers,
Ed
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