"'Why,' Mr. King asked, 'were banks willing to take risks that proved so damaging both to themselves and the rest of the economy?' His answer: 'One of the key reasons ... is that the incentives to manage risk and to increase leverage were distorted by the implicit support or guarantee provided by government to creditors of banks that were seen as "too important to fail"'. Politicians--and the US [Fed] Chairman--hate hearing that it was their subsidies for credit and for the biggest banks that contributed to the problem", WSJ Editorial, 23 October 2009, link: http://online.wsj.com/article/SB10001424052748704224004574489254094714512.html.
Friday, November 6, 2009
UK and Glass-Steagall
"Bank of England governor Mervyn King, saying new regulations won't prevent failures of big banks, made a strong call for breaking up some of the world's biggest financial firms, a view that takes on increasing significance because he is likely to gain new regulatory powers in the next year. ... Finance ministers across Europe share Mr. King's worries about systemic risk and on Tuesday signed off on an agreement in principle to establish a financial watchdog covering the 27-nation bloc. But the UK held up formal approval because of concerns that three banking subsidiary supervisors covering banking, financial markets and insurance could impose decisions on national governments with fiscal consequences.'The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believes, force us to confront the "too important to fail" question,' Mr. King said in a speech to Scottish businesssmen Tuesday. 'The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.' ... Mr. King appeared to take a swipe at recent banking overhauls put in place by the FSA, the Labour Party and banks themselves, saying that there had been 'little real reform.' Mr. King's views will get a hearing from the opposition Conservative Party, whose finance spokesman said that these 'is a case for separating banking from riskier activities,' though he belives that needs to be done on an internantional scale", Natasha Brereton and Stephen Fidler at the WSJ, 21 October 2009, link: http://online.wsj.com/article/SB125607015746097133.html.
Corporate limited liability is the problem. Answer: ban corporations from holding federally insured deposits. Henceforth only unlimited liability general partnerships may hold them. If vampire squid wants to gamble with its money, fine, not with public funds.
I don't care what Zimbabwe Ben thinks. Low interest rates were largely responsible for our current crisis.