Arnold Kling  

Today on the Eurozone Crisis

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Let's Deregulate all the Lawye... Arnold Kling's Paradox of Thri...

Johnn Cochrane makes the case that bank regulators are not up to the job.


The last generation of smart MBAs got around capital requirements by pooling risky assets into "AAA" securities that had lower risk weights, and then putting those securities in special-purpose vehicles with off-balance-sheet credit guarantees. VoilĂ ! Same risk, no capital. I can't wait to see what they come up with this time. Diligently following risk weights, European banks built capital ratios by selling good loans and keeping "risk-free" sovereign debt.

Read the whole thing. Pointer from Kevin D. Williamson, who writes,

if it's conspiracy kookery to suggest that Wall Street likes having access to easy money at concessionary rates, bailouts, and the privilege of being too big too fail, then the grassy knolls are going to get awfully crowded.

They will get even more crowded to the extent that it becomes clear that U.S. taxpayers, via the Fed and the IMF, are engaged in another bailout.


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COMMENTS (2 to date)
Bryan Willman writes:

One wonders if "banking" as it exists today ought to be replaced by some completely different sort of institution.

I don't know how it would work, but I'm thinking of a scheme where intermediation is done by some kind of auction market - you don't get a home loan from a bank, you float "shares of your mortgage" with a collateral binder in an auction, people either buy it all or not. Some caretaker/administrator/trustee takes a cut, but they only do servicing and resolution of defaults.
[Surely somebody has thought more about this?]

Point being that if the banking system no longer contained large risky institutions, we would not longer have to try to regulate them...

Kevin writes:

"Same risk, no capital." That's simply not true. Only the senior paper had the low capital requirements, and those instruments absolutely did not have the "same risk" as the underlying debt.

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