Arnold Kling  

Calomiris on the Crisis

Data and Dogma... Pseudo-Competition...

Charles Calomiris talks with Russ Roberts. It is a long podcast, and it is perhaps the best ever. I hope that it gets transcribed, published, and widely disseminated.

Consider the following statement:

Deposit insurance is the _____ for banking crises.

Calomiris argues that we should fill in the blank with "cause," not "solution."

But that is actually a minor part of his story. Listen to the whole thing.

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COMMENTS (17 to date)
Ironman writes:

Shoot! I was going to suggest "opiate" as the fill-in-the-blank word....

Daniel writes:

"Alcohol is the cause of, and the solution to, all of life's problems." - Homer Simpson

winterspeak writes:

What a load of crap. If this crises has shown anything, it is that the liability side of the balance sheet is no place for market discipline.

Willful Ignorance of financial accounting is the ________ of libertarianism

For both the banksters and academic economists, it's like the last 12 months never happened.

Michael G. Heller writes:

Arnold: I agree, this was a stand-out podcast. Made a big impression on me. Poor Russ could hardly get a word in edgeways, but Calomiris was worth every cent. I have no way of telling whether the empirical evidence is right or wrong, but the argument is incisive, persuasive, and contrasts sharply with the op-ed and press-pundit norm. I'd go so far as to say it is revelatory. Hope he writes it up.

Floccina writes:

winterspeak it seems to me that if you and the new Keynesians are correct, there is no hope of avoiding the occasional finical collapse. The politicians and the regulators get sucked in just as much as everyone else. And it is not just right leaning politicians, for a long time there have been those on the left that have complained that the FED would raise interest rates just when good times started to reach down to low income workers. That is a call to keep the party going and applies not just to interest rates but loose lending.

What is the old saying: anything that can go wrong will go wrong. I have been reading a little about free banking looking for a system were when some banks fail it is good for other banks, making the system more robust against systemic failure.

winterspeak writes:

Floccina: Why do you say that? And what is a "new Keynesian?" Maybe you mean a post Keynesian?

There are lots of ways of avoiding financial collapse. They all involve looking at the financial system that is, rather any of the many alternatives Arnold, the Fed, and the macro textbooks keep touting.

Lauren writes:


For a definition and overview, see New Keynesian Economics, by Greg Mankiw in the Concise Encyclopedia of Economics. The term "New Keynesian" has been in use since at least the 1980s.

joecanuck writes:


can you point me to any papers/blog entries that sum up your view on macro/the crisis? I'm genuinely interested in your perspective, but doubt this is a good place to ask for a detailed explanation.

Floccina writes:

@joecanuck, winterspeak seems to have a web page here:

winterspeak I agre with most of what you say on the web page ( assuming that is you) especially in the following posts:

Why FDIC is a fraud
Looking Back at the Bailouts
Geithner almost gets something right

Nick writes:


I am curious which parts of Calomiris' talk you disagree with? Have you listened to the podcast or are you just making a reply based on the blog post content?

I have a gut feeling he overstates the role of Fannie/Freddie as causative agents but that aside I believe his points seem well argued and valid.

winterspeak writes:

Lauren: Thanks for the link. Greg I am familiar with. New Keynesianism, then, is a load of hogwash too.

My position is not a New Keynesian one, it is a Post Keynesian one. I know, these titles are like something of a Monty Python sketch -- I did not make them up!

joecanuck: My blog is OK. Warren Mosler's is much better, particularly his mandatory readings. moslereconomics DOT com

NICK: I tried Russ Roberts podcasts in the past and they were not to my taste. I don't have the stomach to try again.

The claim that "deposit insurance is the cause for banking crises" reveals such profound ignorance of finance, accounting, monetary operations, banking operations, and the last 12 months that I don't think I'm taking a big risk ignoring it all.

Of course, that is Arnold's interpretation of the talk, but Arnold is a fair guy. I'm confident that his summary is accurate.

Nick writes:


I actually would say that "deposit insurance is the cause for banking crises" mischaracterizes his point to a large degree. He brings it up in a rather provocative way essentially saying that banks game the system to make sure large depositors can have every penny insured. This however is a very small point in a very long podcast. Most of it relates to essentially bad regulations and bad regulators.

I think one of the most interesting bits however is near the end of the podcast, where he discusses the role of the rating agencies and the sort of willful ignorance these large institutional investors played in the whole thing. He heavily implies that these money managers in pension funds, mutual funds and others knew the rating agencies were wrong but did not care. He draws attention to how the managers of these funds are paid (versus hedge fund managers) coupled with the fact there are few other options in the market they serve (non accredited investors). I think makes a very good case that these money managers have little impetus to make responsible choices. It also seems to explain why whenever you have catastrophic failures these type of institutional investors are always there taking the hit.

winterspeak writes:

NICK: Thanks for the details. Maybe I've been unfair to Calomiris.

Calling the FDIC guarantee "insurance" is nonsense -- the Fed should simply back all deposits 100% and not tax banks for that.

They should also focus banks on credit analysis, since their purpose is to assess credit risk. It isn't complicated setting up incentives to do just that.

Finally, for banks, public capital is always at risk, but private capital should be at first risk position (so credit analysis is done correctly). The point is that so long as banks have access to their reserve accounts, and the Fed is willing to lend unsecured to them through the discount window, and chooses to ignore capital ratios, banks can continue operating with negative equity and never let liquidity or solvency issues force them to cease functioning.

Handling large, interconnected banks when they fail is not that complicated, and it needn't ever be catastrophic.

George writes:

Arnold wrote:

I hope that it gets transcribed, published, and widely disseminated.

Nobody's going to volunteer to sit down and transcribe ninety minutes of economics talk. But I bet you could find nine people to transcribe ten minutes each. (This is how Stack Overflow et al. get transcription done.)

Dibs on the first ten minutes (measured from the very start of the podcast, music and intro and all). I'll email the text to you and Russ.

Hi, George.

You may not know this, but each EconTalk podcast does already have a very substantial near-transcript called Highlights. I type them up real-time while I listen to the podcasts before they are released to the public.

For example, here are the Calomaris Highlights.

While I don't have time to indicate the speaker (I'm a very fast typist but not that fast!), I do fix some unclearly-stated ideas, sentence stumblings and restarts, and I make sure the spelling of names is correct so that people can look things up online. I note time breaks at reasonable topical junctures, which usually corresponds to every 10 minutes.

They are not transcripts, but I suspect they are more consistent and better-proofread than we'd have with many contributors trying to do it--well-intended as that may be.

Professional transcripts have occasionally been created for some of our high-profile podcasts, and could possibly be considered for other podcasts.

Nick writes:

OK reading the transcript he does say deposit insurance is "the single biggest contributor to risk" but then goes on to list dozens more....

George writes:


You wrote:

You may not know this, but each EconTalk podcast does already have a very substantial near-transcript called Highlights. I type them up real-time while I listen to the podcasts before they are released to the public.

I'm aware of the Highlights, and I used to find them very useful when deciding which episodes to listen to (now I just listen to all of them). They have other benefits, too: making EconTalk episodes show up in web searches, providing topical organization, pretty much anything meeting minutes or really good lecture notes do. However, as you say:

They are not transcripts...

...which is what Arnold was wishing for in his post. I have a good set of wrenches in my toolbox, and I like them a lot, but when I need a hammer, I need a hammer.

... but I suspect they are more consistent and better-proofread than we'd have with many contributors trying to do it--well-intended as that may be.

Here we disagree: as a computer geek, I've seen plenty of volunteer-created artifacts with far better quality than a lot of professionally-created ones. And, on a different but more relevant note, I've seen mob transcription work well. It could be there's a self-selection effect, where only borderline-OCD people (like, say, me) volunteer in the first place. At any rate, is there any reason not to at least experiment with it?

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