It takes imagination to be boring
I suffer from a lack of imagination.
I have been so inculcated in the necessary complexity of finance and banking, that I’ve lost touch with some basic, simple realities. I have been brainwashed by the half-assed and lame attempts at regulation by the elements of the Dodd-Frank bill, losing myself in the details of the Volcker Rule for example, and I’ve lost the forest for the trees. I’m spending my time furiously figuring out how to allow banks to have all of their goodies (CDS, derivatives, repos, etc.), but not let them eat so much they get themselves (and us) sick.
Sometimes you need imagination to be boring.
Luckily, there was an op-ed article in the New York Times yesterday which served as a wake-up call. The article is called “Bring Back Boring Banks” and it’s written by Amar Bhide. I kind of feel like quoting the entire article, since it’s all so good, but I’ll make do with this part (emphasis mine):
Guaranteeing all bank accounts would pave the way for reinstating interest-rate caps, ending the competition for fickle yield-chasers that helps set off credit booms and busts. (Banks vie with one another to attract wholesale depositors by paying higher rates, and are then impelled to take greater risks to be able to pay the higher rates.) Stringent limits on the activities of banks would be even more crucial. If people thought that losses were likely to be unbearable, guarantees would be useless.
Banks must therefore be restricted to those activities, like making traditional loans and simple hedging operations, that a regulator of average education and intelligence can monitor. If the average examiner can’t understand it, it shouldn’t be allowed. Giant banks that are mega-receptacles for hot deposits would have to cease opaque activities that regulators cannot realistically examine and that top executives cannot control. Tighter regulation would drastically reduce the assets in money-market mutual funds and even put many out of business. Other, more mysterious denizens of the shadow banking world, from tender option bonds to asset-backed commercial paper, would also shrivel.
This is what we need to do. Thank you Amar Bhide, for having the clarity to say it.
mathbabe 
That was a great piece. When the crisis happened, there was a lot of comparison of our banking system with the more traditional German system of savings and loans, where dangerous multi-industry institutions were not allowed. They claimed that the modest, relatively safe growth of these banks is “the backbone of the German economy”, and I’m inclined to agree that the need for sustained short term profits is the root of most of our troubles.
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A fair number of more traditional German banks had severe problems; also, note that we managed an S&L crisis with rather vanilla institutions. This doesn’t really seem like a good answer.
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I don’t know…I’m remembering that one of the largest bail-outs was of AIG. The mortgage fraud and CDO nonsense was due to greed-driven criminality and the mass delusion of investors (with rating-agency collusion), rather than being about excessive complexity. It seems to me that the big money will always find somewhere to go in search of the big returns, and that even if you
could get major restrictions and prohibitions on banking activity enacted here, it’d never happen internationally as would be necessary if such measures were to be effective. Somehow, the means of adequately overseeing and regulating the shenanigans must be found.
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We will never be able to overcome greed. The point is to make the system safe for the average person’s deposits, and let the gamblers gamble and win or lose with their own money. In other words, separate the institutions that people depend on, and make them boring, from the high-rolling risky institutions; when they fail, they fail.
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This is a good first step. It’s exactly what my credit union is.
Chartis/AIG’s failure would have wiped out many useful activities, including insurance for municipalities. The allowance of AIG to both insure mission critical infrastructure (all state and local governments) and write CDS was a major regulatory failure too.
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Dear Cathy, are you ironic in this post? If so where precisely? (I ask sincerely.)
Thanks for the post and the blog in general.
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Not ironic. I mean, the title sounds like a contradiction in terms, but I am honestly floored by how complicated I have been making all of this. We need to be boring.
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