A couple of big banks being allowed to fail as a consequence of their mistakesâŚ
âŚFAIL in full public view like a smoking wreck at the Indy 500âŚ
âŚwould do more to clean up the financial industry than the concerted efforts of all the faculty lounges in all the colleges of the world.
It is to George Bushâs eternal discredit that he and his enablers in Congress (Barack Obama and Hillary Clinton among them) intervened to prevent this.
Our second task is to use our research and our teaching to curb the rent-seeking dimension of finance.
Thereâs another dimension then? One Iâve never heard of?
@lolipop_jones, I donât think thatâs right. For one thing, looking back itâs like the whole industry was a house of cards. One or two spectacular failures could have brought down the whole mess and made the recent recession look mild. Before we can gloat over Bear Stearns, we need the system reformed so that itâs no longer a house of cards. Everybody knows how to do this - reinstate Glass-Steagal and maybe bust up a few of the biggest players. But they will fight tooth and nail, and we can expect anybody who moves such legislation to be viciously smeared.
The thing Iâd like to see is the return of trust. Trust used to be of utmost importance to bankers - look how many banks put the word right there in their name. Today itâs been replaced with âthe only game in town.â I wonder what it would take for credit unions to begin to out-compete commercial banks? I wonder if a Postal Bank will ever fly?
One way performance is goaded and whipped out of the system is for it to be a controlled demolition where there is a trail of destruction but the wave front is propelled by explosives and the fastest horses outrunning the inflation and the collapses. Modern finance is a rent seeking bastard which I hate for pre-picking a few connected winners to take home the royal lottery. OTOH look at how badly the world sucked before we lit a fire under our asses with nastyness and fraud such as fractional deposit banking.
Propelling a bicycle with a rocket makes for many fatalities, but also for some really fast bicycles for the Darwinian most ruthless winners.
âWhen you teach your students that itâs âeconomically rationalâ to commit
crimes where the fines for misconduct are lower than the expected
return on the crime, you instill a professional ethic that has no room
for morals.â
Bingo.
If the âreformâ amounts to more of Dodd-Frank - âComply with these 12,000 pages of new regulations and weâll still bail you outâ - itâs not only a full employment act for more and more parasites, but it pushes smaller players completely out of the market.
Trust in that context refers to something wholly different:
The words are not in the names to indicate that they are trustworthy, concerned about earning your trust, or any other variation there of. The words there to indicate that they operate as a trust of some sort in terms of what sort of legal entity they are (or were at the time they were named).Think of a trust fund.
The sort of ethical trust your thinking about isnât even necessarily as washy a concept as your presenting it. The sort of do right by your customer approach was intended to retain those customers and attract more at a time when banks still operated on a relatively simple pay people for deposits/investments, use those funds to charge them for loans/investments model in fairly limited markets. The repeal of sensible regulation (like Glass-Steagall) , and globalization means that they can make the bulk of their profits by selling insurance, investing their own funds in dodgy ways, betting against their customers best interests, owning significant chunks of profitable companies, etc. They donât need your trust, or to ensure life time business from entire communities, to remain stable and make money anymore. They can make billions doing thousands of other things, sometimes illegal things. With far less risk. Or they can simple move into markets they never had access to before. Or do a really bad job for a thousand times more customers. Or make more money nickel and diming their now much bigger customer base.
but it is economically rational. One of the major goals of academic economics policy is to come up with policy that will actually influence behavior, and one of the primary ways to do that is to make socially beneficial behavior economically rational. You have to be able to understand what is economically rational to understand why people are doing socially detrimental things, and to be able to understand how to help push people to do more beneficial things.
Why do we continue to assume people are ârational?â About half of all Americans vote for the leaders who will hurt them the worst. Corporations that benefit from Food Stamps lobby against them. How could rational people buy stocks during the dot-com bubble when even entertainment journalists knew it was a bubble?
Only in a context-free vacuum.
For the individual actor in the short term it certainly seems rational.
But at scale and consistently implemented, you see the thing that the law was meant to prevent happen.
So for the stability of the system, you must refrain from the irrationality of instant gratification, and encourage a more long-term perspective of ecosystem health.
The problem is, human beings, even (especially?) in finance, are absolute shite at doing stuff for the long-term health of anything.
I donât think academics should give them a hand up. I say itâs gotten bad enough. Letâs let it get so much worse that we have no choice but to destroy it and abolish everything about it that made it harmful.
I do think itâs right, not because I know it wouldnât have caused a depression**, but because I think the idea of primum non nocere is implied in trust, which you later (rightly) invoked.
I donât think itâs right to deal with financiers run amok by using the money and assets of the lower and middle classes to simultaneously bail the financiers out and provide them with still more capital and assets with which to repeat similar schemes.
**speculating about counterfactuals, blah-de-blah, but I follow Mark Blyth and some of his Keynesian cohorts who think it wouldâve been right to let the big banks fail (he specifically addresses a real-world bank failure in the Q&A and devotes a chapter to it in his austerity book).
The bigguns wouldâve disintegrated on their own (i.e. w/o bureaucratic intervention), all the hyper-smart unemployed wouldâve gotten ârealâ jobs, and remaining and future banking and securities firms couldâve been more easily re-regulated with a Glass-Steagall-type bill that is actually effective (thereâs plenty of decent writing by economists, financiers, presidents, etc that it wasnât doing what it was intended to do).
- Aside: âactual effectivenessâ also requires continual adversarial regulation
of banking and securities firms; when greed is explicitly the primary
motivator of a group, it does whatever it can to sate itself. As they
say, you donât fight stationary wars of position with moving enemies.
We couldâve even capped the assets of any future heavyweights to see off more economy-crashing chain reaction scenarios, but that wonât happen now precisely because the banks were bailed out and thus they retain the centralization and networking which concentrates their governmental influence.
A big olâ crisis seems to be coming whether we want it or not. Theyâre screwing us now even harder than they were beforeâtheyâre âeven too bigger to failââand theyâre using control (and increasingly, outright ownership**) of our money and meager assets to do it.
**see every chart about the transfer of wealth in US history or specifically during these bank crisis periods.
Because itâs an assumption that leads to much nicer, math-ire, models than any of that touchy-feely-humanities-wimps âbehavioral economicsâ hogwash does.
This is why I always model the economy as a frictionless planar surface, without barriers to entry, where spherical merchants radiate goods and services uniformly in all directions(with attenuation at distance according to the inverse square law). You wouldnât believe how much time it saves.
The finance graduate who explained to me the process behind the creation of financial instruments, designed to be met by new legislation but with a 3-5 year plan for evolving the loopholes which would exempt said instruments from actual taxation was surprised when I asked him if he thought the practice was ethical.
His response? âBut if theyâre smart enough to escape regulation, why should they be captured by it?â
My counter argument about being smart enough to murder him and get away with it was met with a kind of blank stare that made me reconsider ever using sarcasm with him again. Nice chap. Total sociopath.
Yes, but for how long?
The surviving institutions would halfheartedly clean house and politicians would bluster and blow and pass weak new laws and compromised regulations.
The new rules would have loopholes right from the outset, carefully crafted for the politicos and their supporters. And the dollar is a powerfully addictive drug to some people. Over time, the financial junkiesâ shameful memories would fade or be suppressed by the promise of more fixes in the future. The once-fallen financiers would again pressure hand-out happy politicians to loosen up the rules, and the whole cesspool would fill up again.
It would (or will, depending on your level of optimism) take larger, systemic changes to both industries - financial and political - to set things right for the long term.
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