[OPE] Prof. Rogoff on the banks

From: Jurriaan Bendien <adsl675281@telfort.nl>
Date: Wed Aug 19 2009 - 09:41:54 EDT

Prof. Rogoff doesn't mince words:

Why we need to regulate the banks sooner, not later
By Kenneth Rogoff


Published: August 18 2009


(.) "The fact is that banks, especially large systemically important ones, are currently able to obtain cash at a near zero interest rate and engage in risky arbitrage activities, knowing that the invisible wallet of the taxpayer stands behind them. In essence, while authorities are saying that they intend to raise capital requirements on banks later, in the short run they are looking the other way while banks gamble under the umbrella of taxpayer guarantees." (.) http://www.ft.com/cms/s/0/c2d523c0-8c21-11de-b14f-00144feabdc0.html

The question however is how you would regulate the banks, since the track record of regulation shows that the banks then find a legal construction which gets around the regulation, using the political clout and financial power they have. Free traders therefore argue that bank regulation can be safely left to themselves, since they are punished by the market and forced to adjust their strategy; the debate then turns on whether state support is really beneficial or not, or whether it merely rewards dubious financial practices at the expense of the taxpayer.

Marxian economist Costas Lapavitsas points out that:

"Basle I regulations, formalised in 1988, stipulated that internationally active banks should maintain own capital equal to at least 8% of their assets. Basle II, which began to take shape in the late 1990s, allowed banks that use modern risk-management methods... to have a lower ratio, if certain of their assets had a lower risk-weighting. The aim of the regulations evidently was to strengthen the solvency of banks. The actual outcome was exactly the opposite. For, capital is expensive for banks to hold. Consequently, commercial banks strove to evade the regulations by shifting assets off the balance-sheet as well as by trading CDSs, which lowered the risk-weighting of their assets. Therefore, Basle II effectively promoted securitisation. By engaging in investment banking practices, commercial banks could continually 'churn' their capital, seemingly keeping within regulatory limits, while expanding assets on and off the balance-sheet. In this marvellous world, banks appeared to guarantee solvency while becoming more liquid. When the housing-bubble burst, it became clear that these practices had created widespread solvency-problems for banks. As mortgage-backed assets became worthless, independent US investment-banks were rendered effectively bankrupt in view of extremely low capital-ratios. For the same reason, commercial banks found themselves in a highly precarious position. Even
worse, as the crisis unfolded, Basle regulations forced banks to restore capital ratios precisely when losses were mounting and fresh capital was extremely scarce. (...) Banks have acquired some of the character of the broker, while partially losing that of the financial intermediary. This has created problems in assessing borrower-creditworthiness in a socially valid way. For, in a capitalist economy, this task has traditionally been undertaken through partly 'relational' interactions of banks with other institutions and markets in the financial system. The picture that emerges for commercial banks is bleak. They are no longer major providers of investment-finance to corporate enterprises; their capacity to collect information and assess risk has been compromised; and their mediation of workers' needs has been catastrophic. " ("Financialised Capitalism: Crisis and Financial Expropriation" by Costas Lapavitsas, Historical Materialism 17 (2009), p. 137, 140).

Probably the only sure-fire way to "regulate" would simply to outlaw certain forms of trade, and keep doing it with all the constructions subsequenly invented to evade the law. Trouble with that idea though, leaving aside liberal commitments to free trade, is that it will raise the cost of capital to business, government and households, in particular because capital then is likely exit the country in which capital controls are applied, and is less likely to enter it. In that case, all countries have to apply the same legal stricture simultaneously, but even if that could be achieved - remember the difficulty of applying even just a Tobin tax, or harmonizing tax systems - it will still raise the cost of capital, since some lucrative placement options then disappear, and this obviously must have recessionary consequences as well.

Another option that has been mooted is to split the banking system into a (publicly owned) facility catering to small savers, and a (private) banking facility for business where both the gains and the losses could be greater. The trouble with that idea is that (1) both sectors still face the same internationalized capital and money markets (2) effectively one sector would be subsidizing the other, and (3) society as a whole could still not escape anyway from the impact of losses incurred by the private sector.

What makes this discussion somewhat ludicrous is that, in fact, states have been raising their debt levels at a great speed of knots, becoming effectively an intermediary which converts tax claims into "safe" investment earnings, under conditions where states are mostly unable to control currency exchange rates anymore, at most influence them. And thus, it looks very much like few effective intermediate reforms are feasible between self-regulated banking and large-scale nationalization of the banks, with capital and currency controls.


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Received on Wed Aug 19 09:47:15 2009

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