Dr. Gonzo<\/b>: <\/span> Regarding your bank tax<\/a><\/span> piece<\/a>: Making the banks smaller isn’t sufficient. The small banks have been a disaster as well, and a huge drain on the FDIC’s funding.<\/a><\/p>\n Derek<\/b>: That’s an interesting point.<\/p>\n<\/div>\n Derek<\/b>: Are you saying bigger banks are less likely to fail?\n<\/div>\n<\/div>\n <\/p>\n So in general I would recommend that we get our vocabulary straight, and then we can have a more precise conversation about what behaviors we’re trying to change.<\/div>\n<\/div>\n The most important economic debate of 2010 will be how to reform the financial sector to make it more stable. Many of the most popular ideas — reducing leverage, raising capital requirements, even taxing financial transactions — rest on the principle that smaller banks support a more stable financial sector. I just wrote a blog […]<\/p>\n","protected":false},"author":1534,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-171920","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/171920","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/1534"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=171920"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/171920\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=171920"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=171920"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=171920"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nThe FDIC funds itself through bank assesments. So it’s not necessarily
\nthe tax payer’s problem. But the FDIC will prob get assistance at some
\npoint if these conditions persist.<\/p>\n<\/div>\n
\nI think the gist is this: Bigger means better access to capital
\nmarkets and in general more diversified assets and sources of funding. So big institutions can
\ntake big hits without failing. But when they do, the costs are enormous
\nand can be destabilizing.<\/div>\n<\/div>\n
\ncommunity bank in kansas. Your assets are probably all local loans. If your town has a bad property market<\/span>, you’re done for.<\/div>\n<\/div>\n
\nthe funding side, honestly, I have no clue, but I doubt that some local
\nbank in Kansas has access to the capital markets in the same manner and
\nscope that Goldman or Merrill does. So if a small local bank needs emergency funding
\nit’s going to be tough. Goldman needs emergency funding, and they call
\nWarren Buffet. He writes them a $5 billion check<\/span>.<\/p>\n
\ndo
\nyou think it’s misguided to fetishize the benefits of small banks? Or
\nis yours more of a Goldilocks position. That small banks lack the
\nlarger banks’ access, but there’s a Too-Big-To-Fail tipping point that
\nwe want to
\nfind ways to avoid, or at least regulate much more effectively?<\/span><\/div>\n<\/div>\n
\nBut I definitely think the small is better thing is pretty unfounded
\nand runs contrary to common sense, specifically considering
\ndiversification. I mean, 2008 was all about market risk and assets
\nhitting the floor at the same time. But just because diversification
\ndidn’t work as well as it should, doesn’t mean that it’s not useful.<\/div>\n<\/div>\n
\nis definitely fetishized, and IMHO, not based in any objective theory
\nor evidence. It’s just an aesthetic people like to cling to.<\/div>\n<\/div>\n
\nSalmon<\/a>
\naren’t saying: Let’s regulate Goldman until it devolves into a local
\nKansas community bank. They’re saying: There are some taxes that could
\na) discourage hyperaggressive betting and b) discourage banks from
\ngrowing so big that the government has no choice but to bail them out.
\n<\/span><\/div>\n
\noff most of these “banks” are not banks. The ones on the FDIC list,
\nthose are banks<\/i>. They take deposits, make loans, etc.
\nGoldman and Merrill and so forth, they’re money centers, financial
\nintermediaries. Some of them have bank subsidiaries like Citi, but for
\nthe most part advice on transactions, broker not only ordinary securities but also funding for businesses and hedge funds, act as custodians for securities, and and in some cases, make markets by
\nbuying and selling instruments like a bookie. It is really the last three functions that make them so
\nimportant to the financial system.<\/p>\n
\n
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