more rioting, plz...,
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why my family will never become powerful financiers...,
Apparently this is the hot topic today. Responding to an argument for smaller banks, Tyler Cowen agrees with Kevin Drum that... What?
I have a feeling that nostalgia for the [system of smaller banks of the] 70s just isn't going to work. Big companies are here to stay, and I suspect that any regulation stringent enough to keep banks small enough to fail won't be sustainable. And unless we reign in overleverage and massive waves of credit expansion, it won't do any good anyway.
Did you see an argument occur there? Well, there's a naked claim that "big banks are forever" at a time when the big banks are slowly imploding. Odd, no? Then there is a sort of conclusion, or rather two conclusions:
a) Firm size is irrelevant to credit expansion. We should regulate something else.
b) We are powerless for some unmentionable reason before the political juggernaut of finance to "sustainably" regulate firm size. We should regulate something else.
b) doesn't make any sense at all, and seems to entirely elide the issue of whether it's easier to regulate big concentrated firms or small decentralized ones. Almost self-evidently the latter is true, because it costs more for many small firms to organized unified political influence to undermine said regulations. Nevermind that the conclusion is completely contradictory: if you can't regulate something as simple as bank size "sustainably" how are you going to regulate anything else "sustainably"? So let's pretend it wasn't offered and that Tyler Cowen is agreeing with a).
a) doesn't make any sense because the problem of "overleverage and massive waves of credit expansion" has already "fixed" itself. The Federal Reserve is functioning as the lender of last resort because the private sector is (very clumsily and/or dishonestly) deleveraging and going through a tide of credit contraction. Nevermind that preventing credit bubbles is not germane to the argument for smaller banks if the argument is that smaller banks make it easier to recover from credit collapses. As the proposed solution had nothing to do with preventing credit bubbles we can't fault the proposed solution for not preventing credit bubbles.
This leaves us with the confusing conclusion that Kevin Drum doesn't actually have a conclusion for Tyler Cowen to agree with. They are non-responsive to the argument.
Kevin did have a list of questions that were good and pretty easily answered, but can you agree with a question?
So just what would the limit be on bank size? ... Can a country the size of the United States even have nationwide banks with limits like that? And what happens the next time around, when all these smallish banks overleverage themselves and collapse en masse? Are we any better off than we are with a few big banks failing?
Let us answer them in turn:
- Banking has a pretty small maximum efficiency of scale, it would make sense to set it to that.
- Yes. I remember this one time when Simon Johnson wrote a long article answering this question.
But I'm going to go back and re-post that quote from Adam Smith, because I agree with Adam:
[A financial sector composed of small rather than behemoth banks] increases the security of the public. It obliges all of them to be more circumspect in their conduct, and, by not extending their currency beyond its due proportion to their cash, to guard themselves against those malicious runs which the rivalship of so many competitors is always ready to bring upon them. It restrains the circulation of each particular company within a narrower circle, and reduces their circulating notes to a smaller number. By dividing the whole circulation into a greater number of parts, the failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the public. This free competition, too, obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away. In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so.
Since Kevin brings it up, though, it bears repeating Adam Smith's solution for "massive waves of credit expansion" while we've got the book out:
The legal rate [of interest], it is to be observed, though it ought to be somewhat above, ought not to be much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent, the greater part of the money which was to be lent would be lent to prodigals and projectors, who alone would be willing to give this high interest.
Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it.
Where the legal rate of interest, on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred, as borrowers, to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people than in those of the other. A great part of the capital of the country is thus thrown into the hands in which it is most likely to be employed with advantage.
Yes. I think that is quite nearly right. 3686% interest is a tad overboard.
:: posted by buermann @ 2009-03-29 12:56:47 CST |