News/Op-Eds
FINANCIAL CRISIS, FINANCIAL REGULATION
Project Syndicate Jan 19 2022. Account for the grand bailout of 2020, and think a little bit about incentives, please. Blog post
A talk given at the UCSD Economics roundtable June 11 2021. Inflation, Fed policy, fiscal pressures, and a quick tour of the Fed’s entrenchment of bailouts, and forays to climate change and social justice. Youtube video here, slides here, blog post with a bit more commentary here.
“Don’t Let Financial Regulators Dream Up Climate Solutions.” City Journal, March 24 2021. Local pdf
Equity-financed banking. How it works, and substitutes for the Dodd-Frank illusion that regulators can keep us safe. This is the paper behind the talk, next item. In George P. Shultz, ed., Blueprint for America Hoover Institution Press, p. 71 - 84.
Talk given at the Minneapolis Federal Reserve's "Ending too big to fail" symposium, May 16 2016.
In David Wessel, Ed., The $13 Trillion Question: Managing the U.S. Government's Debt, pp. 91-146. Washington DC: Brookings Institution Press. Last manuscript. I propose a restructuring of U. S. Federal debt. All debt should be perpetual, paying coupons forever with no principal payment. The debt should be composed of 1) Fixed-value, floating-rate, electronically transferable debt. Such debt looks like a money-market fund, or reserves at the Fed, to an investor. 2) Nominal perpetuities: This debt pays a coupon of $1 per bond, forever. 3) Indexed perpetuities: This debt pays a coupon of $1 times the current consumer price index (CPI). 4) All debt should be free of income, estate, capital gains, and other taxes. 5) long term debt should have explicitly variable coupons. 6) Swaps. The Treasury should adjust maturity structure, interest rate and inflation exposure of the Federal budget by transacting in simple swaps among these securities.
In Martin Neil Baily, John B. Taylor, eds., Across the Great Divide: New Perspectives on the Financial Crisis, Hoover Press. This is an essay about what I think we should do in place of current financial regulation. We had a run, so get rid of run-prone liabilities. Technology and financial innovation means we can overcome the standard objections to "narrow banking." Some fun ideas include a tax on debt rather than capital ratios, the Fed and Treasury should issue reserves to everyone and take over short-term debt markets just as they took over the banknote market in the 19th century, and downstream fallible vechicles can tranche up bank equity.
Journal of Legal Studies 43 S63-S105 (November 2014). Is cost benefit analysis a good idea for financial regulation? I survey the nature of costs and benefits of financial regulation and conclude that the legal process of current health, safety and environmental regulation can't be simply extended to financial regulation. I opine about how a successful cost-benefit process might work. My costs and benefits expanded to a rather critical survey of current financial regulation. It's based on a presentation I gave at a conference on this topic at the University of Chicago law school Fall 2013, with many interesting papers. JSTOR link with HTML and nicer pdf. The JLS issue with all conference papers.
Wall Street Journal. Macro-prudential policy is a license to discretionary financial dirigisme. Clear lessons of monetary policy warn us not to go down this path.
Wall Street Journal. Don't try to regulate the riskiness of bank assets, while keeping in place government guarantees. Instead, don't let banks issue run-prone liabilities.
Running on empty (pdf) (link to WSJ (html)) March 2 2013 Review of "The Banker's new Clothes" by Anat Admati and Martin Hellwig. Banks should issue a heck of a lot more equity, a heck of a lot less debt, and a heck of a lot less nonsense.
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Wall Street Journal. (Local pdf) A review of the Fed's (the press release here, the proposal -- old link, broken -- vanished off the Fed's website) to regulate big banks -- and, soon, everyone else.
Wall Street Journal. Local pdf. This piece counters many arguments for low bank capital requirements. Capital is not reserves, the required return on equity is lower for better capitalized banks. (Modigliani and Miller work at least a bit.) And no, Dodd-Frank does not mean banks are forever more free of risk.
For more on bank capital requirements, see Anat Admati's Stanford website. Here's the source for quoting Dan Tarullo on more capital. The other side that I was making fun of: JP Morgan testimony and The Clearing House Open Letter. Here is the New York Times mixing up capital with reserves and stating as a fact -- not a quote, not a theory, not an opinion, just a undeniable fact -- that higher capital requirements mean less lending.
Video with Simon Johnson, Raghu Rajan, Rene Stulz, at the AFA meetings
Notes and Pictures. This is a 2 hour lecture for Ph.D. students at the Deutsche Bank Symposium hosted by the Booth School September 2010. It offers a skeptical view of the emerging consensus that the financial crisis is all about "bubbles" "liquidity spirals" "fire sales" "capital constraints" at commercial banks and so on. I do think there was a run on repo and short term financing. Good old fashioned macro asset pricing works a lot better than you might have thought. Some themes are picked up in Discount Rates.
(was “Financial crisis and policy”) Regulation 32(4), 34-37. The financial crisis is mainly about too big to fail expectations. The only way out is to limit the government’s authority to bail out. Article based on a talk given at Cato, Nov 6, NY.
This is a very short article on the “systemic resolution authority.” It’s based on testimony I gave to the House Financial Services committee. No surprise, I’m not a big fan of unlimited power and budgets and no rules.
Wall Street Journal oped with Luigi Zingales. Letting Lehman fail was not the central cause of the financial crisis.
A panel discussion at the Council on Foreign Relations.
This is a piece based on a panel discussion titled “Rethinking asset pricing” at the Spring 2009 NBER Asset Pricing meeting. It includes skeptical views on just how important credit constraints and liquidity really are. Liquidity is the frosting on the cake of finance. There is a lot of frosting these days, but still some cake.
Visit the IGM webpage for links to lots of alternatives proposed by GSB faculty and related thoughts on how to get out of this mess. The 12 days of bailout video
My view of the credit crunch and why the Treasury asset-purchase plan won't work. I think the focus on troubled banks misses the strength of the banking system, and the catastrophic problems in credit markets. It also appeared on the Freakonomics blog.
A letter to Congress against the TARP plan to buy sick mortgages. Luigi Zingales and Paloa Sapienza get credit for organizing this, with help from Anil Kashyap and Rob Shimer. Disclaimer: This letter was sent to Congress on Wed Sept 24 2008 regarding the Treasury plan as outlined on that date. It does not reflect all signatories' views on subesquent plans or modifications of the bill. A nice map showing where signatories come from courtesy of Mark Stouffer. Before anyone gets as swell head, it's worth reading the petition against Smoot-Hawley signed by 1028 economists.
Comments on the credit situation given at the GSB Global Financial Markets Forum, Sept 25 2007. Some good aspects of the current situation, some unheralded aspects of the Fed’s policy, some things that went wrong, and the downside of some quick fixes. Video of the event.
Given at the GSB Global Financial Markets Forum. Some good aspects of the current situation, some unheralded aspects of the Fed’s policy, some things that went wrong, and the downside of some quick fixes.