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How soon we forget

Summary:
The NYT has a piece discussing the Fed’s gradual reduction in bank capital requirements: Some of the changes, seemingly incremental and technical on their own, could add up to a weakening of capital requirements installed in the wake of the crisis to prevent the largest banks from suffering the kind of destabilizing losses that imperiled the United States economy. Another imminent change will soften a rule intended to prevent banks from making risky bets with customer deposits. Translation: “Another imminent change will soften a rule intended to prevent banks from making risky bets with taxpayer insured funds.” After the banking crisis, Congress passed the massive Dodd-Frank bill, which somehow “forgot” to address most of the actual causes of the crisis.  One

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The NYT has a piece discussing the Fed’s gradual reduction in bank capital requirements:

Some of the changes, seemingly incremental and technical on their own, could add up to a weakening of capital requirements installed in the wake of the crisis to prevent the largest banks from suffering the kind of destabilizing losses that imperiled the United States economy. Another imminent change will soften a rule intended to prevent banks from making risky bets with customer deposits.

Translation:

“Another imminent change will soften a rule intended to prevent banks from making risky bets with taxpayer insured funds.”

After the banking crisis, Congress passed the massive Dodd-Frank bill, which somehow “forgot” to address most of the actual causes of the crisis.  One concrete step in Dodd-Frank that its supporters often point to was the higher capital requirements.  But now that’s also being chipped away.

In a perfect world, there would be no capital requirements at all, but also no FDIC, no t00-big-to-fail, no Fannie Mae and Freddie Mac, no FHA, etc.  Given all the moral hazard in the system, there needs to be some way of discouraging excessive risk-taking.

Deregulation doesn’t always reduce the footprint of the government, in this case it makes the government even more involved in the financial system.

Meanwhile, the WSJ reports that “unconventional mortgages” (no longer called subprime) are on the rise again:

How soon we forget

I don’t have strong views on the appropriate regulation of subprime mortgages.  What I object to is procyclical banking regulation.  We loosen regulations during booms and tighten them during recessions.  Thus our banking regulators make the same error as our monetary policymakers—a procyclical policy regime that makes the economy less stable.

There’s a lot of talk about “macroprudential regulation”, but our policymakers do the exact opposite.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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