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This is a great comment. I hope it reaches many people. In the spirit of this comment, and I can't find the particular article I'm looking for right now, but P

This is a great comment. I hope it reaches many people. In the spirit of this comment, and I can't find the particular article I'm looking for right now, but Paul Krugman many years back was writing about how financial services should move more towards a public utility model. The argument is, we would all be better off if we separate off all the risk-taking in finance to for-profit companies that can fail without posing greater risk to the economy. The more mundane, more-necessary, day-to-day financing that we all need (home loans, etc.), according to Krugman, should move to the public utility model. It's not complicated and if the companies that do these jobs fail they pose enormous risk to the entire economy. This is the analogy I can think of: If our water company became bigger, more risk-friendly, and more profit-oriented, people would obviously know that is ridiculous. Basic financial services is not any more complicated, to be honest. The welfare of humanity would benefit enormously from an even more robust version of Glass-Steagall, but the finance industry is so entrenched in US politics I don't see it happening.

mtgx 10y ago
Would that be the same Paul Krugman who only a few months ago said the big banks are not a systemic threat anymore, in an effort to undermine Bernie Sanders' anti-big bank message? http://www.huffingtonpost.com/entry/elizabeth-warren-big-banks_us_570ea9d6e4b03d8b7b9f52aa http://www.huffingtonpost.com/entry/elizabeth-warren-big-ban...
- wallace_f 10y ago
  Yes I know... I stopped reading Krugman. I don't know, it seemed like he used to give a shit and write informatively. Now he just tows the party line and even seems disingenuous at times to be honest.
  - lostlogin 10y ago
    I think the saying is "toes the line", although I could be mistaken.
- eutectic 10y ago
  Or maybe he just has a good-faith disagreement about the importance of bank size?
- jahnu 10y ago
  As far as I can tell his point that shadow banking, Lehman et al, and not the regular banks were the main villains in the GFC is actually pretty accurate.
- icantdrive55 10y ago
  I kinda wish they let those banks fail. Those banks turned around and raised fees for everyone. Don't loan to most small business. Don't loan to most self-employed. Are just horrid institutions. They have just seemingly given the wealthy credit? They have given the wealthy so much money; somedays these 1 percenter's appear to be just gambling? Literally just gambling, except in the realestate market. That market is still a sure thing for them, and very rich investor knows it. And they know so many of us will never qualify for loans; so jack up that rent Thurstan! This recovery hasen't helped guys like me, or my mother who relied of safe cd rates to get ahead. (And no--I'm not blaming banks on low fed interest rates. I probally shouldn't have even wrote that last sentance.) I probally should comment--I'm no expert. I just wonder if we severely regulated credit default swaps, and the derivitave markets--the crash in 2008 would have been less dramatic? The one thing I liked about Bush is he wanted the poor/middle class in homes. He believe little guys should be given a chance. I just wish he went about it with more regulations, on the big boys. My brother in-law used to flip houses. He now is a yoga instructor. The banks won't talk to him. Houses are still being flipped, but only by the wealthy. They are making a killing in my county. They are buying up everything. Why not, at these interest rates, and banks that are literally bending over.
  - eli_gottlieb 10y ago
    >Those banks turned around and raised fees for everyone. Don't loan to most small business. Don't loan to most self-employed. Are just horrid institutions. > >They have just seemingly given the wealthy credit? Let me relate a short story about my experiences with my regional retail bank. Since I don't have my paperwork in order with Vanguard after changing my address, I haven't been able to put my saving money into ETFs and bonds and such like I should. So it's been piling up for more than a year (yeah, irresponsible of me, I know!) in my retail bank accounts, checking and savings. When it piled up to more than $25k, the bank "invited" me to join their "Platinum" accounts. These would impose a whole bunch of minimums on how much I have to keep in my accounts (minimum $10k in checking, minimum $15k in savings, something like that), in exchange for which they would... waive a few fees. And raise my interest rate on savings to the highest heights of 1% annually! Whereas for the normal account, you get 0.02% interest annually, and for a credit card, you can get 1.5% cash back on your spending. They'll pay you more to spend than to save! To the banks, us tech workers with our measly six-figure annual incomes are just more plebs, not even worth an interest rate above inflation.
candiodari 10y ago
> In the spirit of this comment, and I can't find the particular article I'm looking for right now, but Paul Krugman many years back was writing about how financial services should move more towards a public utility model. Fanny Mae and Freddie Mac ... do exactly that. They are abused by politicians for achieving social ends (which should not be their function), first time the politicians know they won't be in office when it blows up (making loan decisions on any factor other than risk should not be done, unless you're prepared to bail out, but that of course means no positive discrimination without bailouts). The second and subsequent set of politicians know they're not really creating a risk, just modifying an existing one slightly. And that's when these companies don't just directly preferentially treat connected investors. Imho Fannie Mae is on track to need another bailout some 6-10 months after the election. > The argument is, we would all be better off if we separate off all the risk-taking in finance to for-profit companies that can fail without posing greater risk to the economy. Given that the government rescues "systemic risks", and CDS contracts are an easy way to transform local risk into systemic risk. Widely-held CDS for a large percentage of loans, like currently exists, means either loan defaults have no effect on the system or crashes the entire thing. Now you could say. "Easy, let's just outlaw CDS contracts". But that's stupidly easy to circumvent, secondly it would disadvantage smaller players further. Or you could say you need more than 2% collateral, but that would immediately collapse pretty much all banks (and they're strongly incentivized to make damn sure that won't change) so can't be done. > from an even more robust version of Glass-Steagall, but the finance industry ... That's equivalent to demanding more collateral for loans. Yes if you can get to the end state the chances of getting your money back when things go south would go up by a lot, but how do you get there ? If you demanded that happens from day 1, all banks would collapse right then and there. I think the more important lesson to be drawn from Glass-Steagall and the related changes of that era is the timing of those regulations : it was introduced just too late. Just barely too late ... to help anyone. It was a PR measure. The same is true for bank guarantees : always remember that the government will never pay those guarantees. If it ever comes to it, the government will withdraw the guarantee before they pay anything. Or do it like Greece and Brazil did : pay it out in worthless non-currency "dollars" that you can't actually buy anything with.
- wallace_f 10y ago
lmm 10y ago
The business of a bank is to understand and trade in risk. That's simple when the risks are simple, but complex as the risks get more complex; 40 years ago it would have seemed obviously ridiculous for programming to be the proportion of our economy that it is now, but programming has grown more complex in proportion to the businesses it's applied to. So it is with finance. (Water supply doesn't require understanding the business; supplying water to a simple business is the same as supplying water to a complex business, whereas making a loan to a simple business and making a loan to a complex business are very different). What line would you even try to draw? It's very difficult to trade risk without a central clearinghouse. It's very difficult to run a central clearinghouse without being willing to guarantee at least some of the risk at least some of the time (you can limit how much, but we already regulate bank capital ratios etc.). Diversification is the banks' best defense against the risks they're taking, so if you require the separation of two more-or-less independent categories of risk (as Glass-Steagall does) that seems likely to make bank failures more likely, not less.
mrec 10y ago
> day-to-day financing that we all need (home loans, etc.), according to Krugman, should move to the public utility model I couldn't disagree more. Making home loans "too necessary to fail" pretty much guarantees a catastophic speculative bubble in residential property. Which, coincidentally, is what we're seeing in many places. I quite like the idea of ringfenced utility banking, possibly even nationalized, but would set the "necessary" bar a lot higher.
- Bartweiss 10y ago
  Presumably doing this right would restrict these loans to "financing". Which is to say, to people with reasonable cash-flow who are seeking up-front capital for a purchase. A good public utility lender would offer low rates, but would have to reject more home-loan applications than the existing speculative players. By this measure, of course, Fannie and Freddie were the opposite of public utility lenders. Done right, I'd like to think that utility lending would constrain bubble growth. Low-risk borrowing would get utility loans, producing actually-guaranteed-AAA investments. High-risk borrowing would remain with private lenders looking for risk, much like business loans do today. The daylight between the two would (hopefully) prevent both housing price bubbles (by offering a stable rate floor) and credit bubbles (by clearly dividing safe, non-profit-seeking loans from speculation). It would likely price up risky loans, but we saw in 2008 that those were dangerously underpriced to begin with. It's an interesting idea anyway, as is a utility model for 'safe' banking activities - non-interest-bearing deposits and financial services.
  - mrec 10y ago
    > Low-risk borrowing would get utility loans, producing actually-guaranteed-AAA investments. I think this is where it falls over. Providing an actual guarantee for things that are low- but not zero-risk is just another way of saying "mispricing risk", and it creates the wrong incentives for pretty much everyone. Borrowers want to push the definition of "low-risk" so they can borrow at a subsidized rate. Lenders (in which I'm including the people buying your "actually-guaranteed-AAA investments") want to push it so that they can lend at zero risk but still make nonzero profit. Governments administering a public utility banking system want to push it because jam today gets votes today, and who cares about tomorrow? IMO this is all happening already with the artificially-low interest rates being pushed by central banks almost everywhere; if they wanted to repeat 2008 I'm not sure they could do a better job. My idea of "utility banking" would exclude any kind of loans. It would include only things which are genuinely risk-free, like transfers and deposits.
Bartweiss 10y ago
I've also seen the suggestion that regardless of where lending goes, "safe" financial services should be moved out into a utility format. That is, investments and loans shouldn't be conflated with non-interest-bearing deposits and money movement. Right now, people are caught in a weird double-bind that mostly serves a small part of the finance industry. - If you don't have a bank account with a balance, you pay through the nose to access money and paperwork (e.g. notary fees, high fees on welfare debit cards, wire transfer prices). - If you do, you expose yourself to the risk-taking of the banking industry. That means losing your deposits with Washington Mutual or IndyMac, and if you stay below the FDIC cap it still means getting scammed when Wells Fargo opens you a fraudulent account. There are some good reasons to combine these things, and some of the costs for non-account-holders reflect the actual price of moving money. But it's not obvious that access to non-investment services should be inescapably bound up with exposure to investment risks and pressures.

mtgx 10y ago

Would that be the same Paul Krugman who only a few months ago said the big banks are not a systemic threat anymore, in an effort to undermine Bernie Sanders' anti-big bank message? http://www.huffingtonpost.com/entry/elizabeth-warren-big-banks_us_570ea9d6e4b03d8b7b9f52aa http://www.huffingtonpost.com/entry/elizabeth-warren-big-ban...

wallace_f 10y ago
Yes I know... I stopped reading Krugman. I don't know, it seemed like he used to give a shit and write informatively. Now he just tows the party line and even seems disingenuous at times to be honest.
- lostlogin 10y ago
  I think the saying is "toes the line", although I could be mistaken.
eutectic 10y ago
Or maybe he just has a good-faith disagreement about the importance of bank size?
jahnu 10y ago
As far as I can tell his point that shadow banking, Lehman et al, and not the regular banks were the main villains in the GFC is actually pretty accurate.
icantdrive55 10y ago
I kinda wish they let those banks fail. Those banks turned around and raised fees for everyone. Don't loan to most small business. Don't loan to most self-employed. Are just horrid institutions. They have just seemingly given the wealthy credit? They have given the wealthy so much money; somedays these 1 percenter's appear to be just gambling? Literally just gambling, except in the realestate market. That market is still a sure thing for them, and very rich investor knows it. And they know so many of us will never qualify for loans; so jack up that rent Thurstan! This recovery hasen't helped guys like me, or my mother who relied of safe cd rates to get ahead. (And no--I'm not blaming banks on low fed interest rates. I probally shouldn't have even wrote that last sentance.) I probally should comment--I'm no expert. I just wonder if we severely regulated credit default swaps, and the derivitave markets--the crash in 2008 would have been less dramatic? The one thing I liked about Bush is he wanted the poor/middle class in homes. He believe little guys should be given a chance. I just wish he went about it with more regulations, on the big boys. My brother in-law used to flip houses. He now is a yoga instructor. The banks won't talk to him. Houses are still being flipped, but only by the wealthy. They are making a killing in my county. They are buying up everything. Why not, at these interest rates, and banks that are literally bending over.
- eli_gottlieb 10y ago
  >Those banks turned around and raised fees for everyone. Don't loan to most small business. Don't loan to most self-employed. Are just horrid institutions. > >They have just seemingly given the wealthy credit? Let me relate a short story about my experiences with my regional retail bank. Since I don't have my paperwork in order with Vanguard after changing my address, I haven't been able to put my saving money into ETFs and bonds and such like I should. So it's been piling up for more than a year (yeah, irresponsible of me, I know!) in my retail bank accounts, checking and savings. When it piled up to more than $25k, the bank "invited" me to join their "Platinum" accounts. These would impose a whole bunch of minimums on how much I have to keep in my accounts (minimum $10k in checking, minimum $15k in savings, something like that), in exchange for which they would... waive a few fees. And raise my interest rate on savings to the highest heights of 1% annually! Whereas for the normal account, you get 0.02% interest annually, and for a credit card, you can get 1.5% cash back on your spending. They'll pay you more to spend than to save! To the banks, us tech workers with our measly six-figure annual incomes are just more plebs, not even worth an interest rate above inflation.

candiodari 10y ago

> In the spirit of this comment, and I can't find the particular article I'm looking for right now, but Paul Krugman many years back was writing about how financial services should move more towards a public utility model. Fanny Mae and Freddie Mac ... do exactly that. They are abused by politicians for achieving social ends (which should not be their function), first time the politicians know they won't be in office when it blows up (making loan decisions on any factor other than risk should not be done, unless you're prepared to bail out, but that of course means no positive discrimination without bailouts). The second and subsequent set of politicians know they're not really creating a risk, just modifying an existing one slightly. And that's when these companies don't just directly preferentially treat connected investors. Imho Fannie Mae is on track to need another bailout some 6-10 months after the election. > The argument is, we would all be better off if we separate off all the risk-taking in finance to for-profit companies that can fail without posing greater risk to the economy. Given that the government rescues "systemic risks", and CDS contracts are an easy way to transform local risk into systemic risk. Widely-held CDS for a large percentage of loans, like currently exists, means either loan defaults have no effect on the system or crashes the entire thing. Now you could say. "Easy, let's just outlaw CDS contracts". But that's stupidly easy to circumvent, secondly it would disadvantage smaller players further. Or you could say you need more than 2% collateral, but that would immediately collapse pretty much all banks (and they're strongly incentivized to make damn sure that won't change) so can't be done. > from an even more robust version of Glass-Steagall, but the finance industry ... That's equivalent to demanding more collateral for loans. Yes if you can get to the end state the chances of getting your money back when things go south would go up by a lot, but how do you get there ? If you demanded that happens from day 1, all banks would collapse right then and there. I think the more important lesson to be drawn from Glass-Steagall and the related changes of that era is the timing of those regulations : it was introduced just too late. Just barely too late ... to help anyone. It was a PR measure. The same is true for bank guarantees : always remember that the government will never pay those guarantees. If it ever comes to it, the government will withdraw the guarantee before they pay anything. Or do it like Greece and Brazil did : pay it out in worthless non-currency "dollars" that you can't actually buy anything with.

wallace_f 10y ago

lmm 10y ago

The business of a bank is to understand and trade in risk. That's simple when the risks are simple, but complex as the risks get more complex; 40 years ago it would have seemed obviously ridiculous for programming to be the proportion of our economy that it is now, but programming has grown more complex in proportion to the businesses it's applied to. So it is with finance. (Water supply doesn't require understanding the business; supplying water to a simple business is the same as supplying water to a complex business, whereas making a loan to a simple business and making a loan to a complex business are very different). What line would you even try to draw? It's very difficult to trade risk without a central clearinghouse. It's very difficult to run a central clearinghouse without being willing to guarantee at least some of the risk at least some of the time (you can limit how much, but we already regulate bank capital ratios etc.). Diversification is the banks' best defense against the risks they're taking, so if you require the separation of two more-or-less independent categories of risk (as Glass-Steagall does) that seems likely to make bank failures more likely, not less.

mrec 10y ago

> day-to-day financing that we all need (home loans, etc.), according to Krugman, should move to the public utility model I couldn't disagree more. Making home loans "too necessary to fail" pretty much guarantees a catastophic speculative bubble in residential property. Which, coincidentally, is what we're seeing in many places. I quite like the idea of ringfenced utility banking, possibly even nationalized, but would set the "necessary" bar a lot higher.

Bartweiss 10y ago
Presumably doing this right would restrict these loans to "financing". Which is to say, to people with reasonable cash-flow who are seeking up-front capital for a purchase. A good public utility lender would offer low rates, but would have to reject more home-loan applications than the existing speculative players. By this measure, of course, Fannie and Freddie were the opposite of public utility lenders. Done right, I'd like to think that utility lending would constrain bubble growth. Low-risk borrowing would get utility loans, producing actually-guaranteed-AAA investments. High-risk borrowing would remain with private lenders looking for risk, much like business loans do today. The daylight between the two would (hopefully) prevent both housing price bubbles (by offering a stable rate floor) and credit bubbles (by clearly dividing safe, non-profit-seeking loans from speculation). It would likely price up risky loans, but we saw in 2008 that those were dangerously underpriced to begin with. It's an interesting idea anyway, as is a utility model for 'safe' banking activities - non-interest-bearing deposits and financial services.
- mrec 10y ago
  > Low-risk borrowing would get utility loans, producing actually-guaranteed-AAA investments. I think this is where it falls over. Providing an actual guarantee for things that are low- but not zero-risk is just another way of saying "mispricing risk", and it creates the wrong incentives for pretty much everyone. Borrowers want to push the definition of "low-risk" so they can borrow at a subsidized rate. Lenders (in which I'm including the people buying your "actually-guaranteed-AAA investments") want to push it so that they can lend at zero risk but still make nonzero profit. Governments administering a public utility banking system want to push it because jam today gets votes today, and who cares about tomorrow? IMO this is all happening already with the artificially-low interest rates being pushed by central banks almost everywhere; if they wanted to repeat 2008 I'm not sure they could do a better job. My idea of "utility banking" would exclude any kind of loans. It would include only things which are genuinely risk-free, like transfers and deposits.

Bartweiss 10y ago

I've also seen the suggestion that regardless of where lending goes, "safe" financial services should be moved out into a utility format. That is, investments and loans shouldn't be conflated with non-interest-bearing deposits and money movement. Right now, people are caught in a weird double-bind that mostly serves a small part of the finance industry. - If you don't have a bank account with a balance, you pay through the nose to access money and paperwork (e.g. notary fees, high fees on welfare debit cards, wire transfer prices). - If you do, you expose yourself to the risk-taking of the banking industry. That means losing your deposits with Washington Mutual or IndyMac, and if you stay below the FDIC cap it still means getting scammed when Wells Fargo opens you a fraudulent account. There are some good reasons to combine these things, and some of the costs for non-account-holders reflect the actual price of moving money. But it's not obvious that access to non-investment services should be inescapably bound up with exposure to investment risks and pressures.