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> In the meantime, please do yourself a favor and take a look at Figure 6 on page 31, which shows that the number of interventions to rescue financial instituti
by elliekelly 5y ago
> In the meantime, please do yourself a favor and take a look at Figure 6 on page 31, which shows that the number of interventions to rescue financial institutions around the world has been increasing consistently since the 1600's.
Is this necessarily a bad thing? I mean that as a genuine question. The number of interventions to rescue people having asthma attacks has probably increased significantly over the same period.
If a financial institution is about to go under isn't it better to have a process by which we can mitigate the pain it causes? To be clear, there is definitely a lot to be desired with the way a lot of bank bailouts have been handled (where Main Street absorbs the downside on behalf of Wall Street) that I think is largely down to politics and "elite" connections but I really don't think the frequency of intervention is an accurate metric by which to judge the effectiveness of the outcome.
- crisdux 5y agoI think it's bad from a moral hazard point of view. These institutions increase their exposure to risk. The interventions exacerbate inequality and other issues. These centralized intuitions are resistant to reform. Reform that does happen increase government reliance. I don't think serious people are advocating for zero interventions. We want a more resilient and fair system by design. Our centralized financial system has made interventions more common and larger in scale. Centralized vs decentralized is a cost/benefit and risk trade off. I personally think we've gone too far in centralizing our financial system.
- lottin 5y agoWhat do you mean by centralised? The financial system is not centralised. It's regulated and overseen by a central authority, but the financial system itself isn't centralised.
- arka2147483647 5y agoOne might argue that if it is the central bank, or the goverment, that underwrites all the risk, then it is that authority who ultimately decides what banks can or cannot do. And therefore banks are not independent, but subservient, to central authority.
- throwaway34241 5y ago> One might argue that if it is the central bank, or the goverment, that underwrites all the risk There are basically three groups of people that can shoulder the risk - the bank owners, the government, and people with money in the bank. Ordinarily it's the bank owners that shoulder the risk, because the government requires them to keep a buffer of "reserves" that get eaten through when loans aren't repaid. The government does insure the depositors if the shareholders lose all their money. You could of course remove those regulations but it seems like you'd still have a moral hazard problem, since the losses of excessive risk-taking still aren't borne by those taking the risks (since they'll be passed to the depositors). Some of these issues seem intrinsic to banking where you're taking risks with other peoples' money almost by definition.
- lottin 5y agoThis is basically right, except what you call "reserves" is actually "regulatory capital" (a form of equity). Banks are also required to keep liquid reserves, but the purpose of reserves is different. https://en.wikipedia.org/wiki/Capital_requirement https://en.wikipedia.org/wiki/Capital_requirement
- throwaway34241 5y agoThanks for the correction, I should have used capital instead of reserves there.
- imtringued 5y agoNo, banks try to screw the central authority by letting it take the losses. https://youtu.be/mhr4JGbozTA https://youtu.be/mhr4JGbozTA