If you’re looking for some exceedingly harsh criticism of the just-passed US financial reform bill, look no further.
Richard ‘I ♥ banks’ Bove is here to serve, with this snappily-titled note:
How Could Rational People Do This?
A caveat first — Bove has had some cringe-worthy bank calls in the past (particularly this one — on the bank whose name shall not be spoken). But we think he may have latched on to something important here. For all its focus on liquidation authorities, central clearing, prop trading, and the like, the Dodd-Frank bill largely ignores the ‘macro stuff.’
That would be things like the relentless search for safe but relatively high-yielding assets in the years before the crisis. Think, for example, of the German Landesbanks’ subprime investments, or just your basic global imbalances. And — lest you think Bove is the only one who thinks about this stuff — have a look here, here or here for some additional macro takes on the crisis.
Anyway, we’re not sure a single piece of American legislature could deal with some of these international issues, but we think Bove brings up some important points that may be worth exploring in the future.
Here’s what he says:
Questions Not Asked
If a desire to solve the problems caused by the financial crisis were evident, some core questions would have been asked by the policymakers. Some very simple ones would have been as follows:
- * Where did all of this money come from?
* How was it created?
* Why is it pooling in emerging nations?
* Why are the so-called wealthy nations constantly increasing their debt and failing to build wealth?If there was a desire to understand banking and why there are so many big banks, some other simple questions would have been asked, such as:
- * Why have these mammoth banks developed?
* Are the mammoth banks in the United States actually so big when compared with banks overseas?
* Why do so many small banks fail or get absorbed?
* What type of business model works best in banking?There is this universal horror related to derivatives. Again, if anyone cared to ask, there are key questions that should have been advanced here:
- * How did the derivatives industry get so large?
* What economic function do derivatives play in the global financial system?
* Since the market is so large and has grown so rapidly, what is it that so many companies, financial and non-financial, find so appealing in the derivatives market?In the desire to bring safety and soundness into the banking system, it is believed that more capital and more liquidity is the answer. Does it make sense to ask these questions?
- * When is there too much capital and liquidity in the financial system?
* Following 1933, the banks in the United States were arguably safer and sounder than at any time in the nation’s history given their high levels of capital and liquidity. * Why were they unable to reverse the direction of the Depression?Finally, staying with simple questions:
- * What would the optimal regulatory structure for the United States banking system be?
* How can accountability and efficiency be developed in the regulatory structure?The fact that these very basic questions were not explored, not even considered, is why I believe that a group of demagogues have pieced together legislation that has little relevance to the factors that created the financial crisis. Therefore, there is little likelihood that this legislation will solve any problems in the financial system. Unfortunately, though, this legislation has the ability to do much damage to the economy.
The thrust of these questions is that the legislators should have looked at the broader macro trends that impacted this industry and not just micro issues. They did not do this and the bill they have written, though long and involved, does nothing to solve any of the broader issues that created the financial crisis. It is a total disappointment that every American is going to pay for in higher banking costs, fewer banking services, and the decline in American banking competitiveness worldwide.
His umm, rather dramatic conclusion:
God help America.
(Meanwhile, those of you looking for more cheerful takes on the bill for a Friday morning might look here.)
Related links:
Futureoffinance.org.uk
Did foreigners cause America’s financial crisis? - Time
Cuomo ‘lacks financial acumen, hates banks’, Bove says - FT Alphaville
It’s so macro, man. (But maybe not for long) – FT Alphaville