QuoteOriginally posted by: MartinghoulQuoteOriginally posted by: Traden4AlphaSeveral facets of the article make no sense to me. First, if the financial oligarchy is so powerful, then why has the Congress, Treasury, and Fed been so stingy with bailout money? Second, the article claims that the bailouts have been grossly favorable to the banks. Yet they weren't so favorable as to restore banks' reserves to safe levels (hence the multiple bailouts and the recent shift to mark-to-model accounting to hide the inadequately generous bailouts). Third, why has the oligarchy allowed discussions of compensation limits or restrictions on repayment of TARP? Clearly there are limits to these oligarchs power. No doubt the financial industry does have significant political power -- more than might be optimal but less than is portrayed in the article. But I suspect that much of that power derives from the fact that the majority of citizens are depositors, bondholders, and shareholders of these institutions. In many ways, the banks are the democratically-elected representatives of our money.Well, firstly, I am not sure I agree about the stinginess of the Fed, if you include the various liquidity provisions/backstops that the banks have benefitted from massively. Secondly, it's obviously not completely black and white and there's always a power struggle at the top between the various constituencies, which is reflected in what we're seeing re TARP etc. Clearly, given this Wall St Pay Bounces Back, the financial oligarchy hasn't done too badly. Thirdly, I agree with you that the banks have been anointed as the 'representatives of our money'. I am not sure I am completely on board with the 'democratically-elected' bit, but my biggest issue with this is that it effectively doubles up our exposure to the agency issues that we already face in such abundance through the political process.I do agree that the Fed has done a good job with the politically-easy elements of its policy (interest rates and liquidity backstops). The Treasury's "bailouts" have been far more problematic for being financially inadequate to replenish bank's capital reserves, inconsistent (and vague), and so string-laden that the firms now fear participation in government programs such as TALF and PPIP. Overall, it's hard to think that banks are coddled oligarchs after looking a trace of their stock prices over the last 12 months (and many of the firms are still trading at deep OTM call prices). Perhaps part of the problem (both the Fed's and my problem) is the continual underestimation of the scope of the problem (the Fed's problem) and the ease of hindsight (my problem).The "democracy" in banking is a one-dollar-one-vote system with a perpetual elections cycle. Everyday, everyone has the opportunity to vote their assets (lock-ups not withstanding) to elect those institutions making the best "if elected" promise for high returns. Losing a vote of no confidence is a run on that bank. It's not a very good democracy, though, because too few "voters" really look at who they are electing. Depositors rarely perform due diligence on the candidate banks and so banks don't worry that much about the quality of their balance sheets. Too many financial citizens (and the banks) assume that the FDIC will pick up the pieces.QuoteOriginally posted by: MartinghoulQuoteOriginally posted by: Traden4AlphaThe deeper problem is that the short-term incentives were fully aligned across the entire system to provide easy money under lax supervision. Virtually everyone in the U.S. (the EU, BRIC, etc.) benefited from the no-questions-asked borrow-and-spend economy -- from the low-wage laborers that built all the houses to the union autoworkers that built SUVs to the Starbuck baristas. Why would citizens, regulators, politicians, or central bankers have any interest in clamping down on the geese that were laying such golden eggs?They wouldn't, I agree. As, I believe, Charles Goodhart put it, 'Bubbles are lovely!'. However, I do believe that, conceivably, the authorities may have exercised somewhat more restraint, if they were not suborned by the financial establishment.Yes, 'Bubbles are lovely!'. But that's just part of the reason that the authorities failed to to provide sufficient restraint. I think Greenspan and Bernanke believed in their own power to manage the business cycle and avoid serious downturns. The quest for confidence in the banks (and central bankers) is so strong that we'd rather have false confidence than Cassandras.QuoteOriginally posted by: MartinghoulQuoteOriginally posted by: Traden4AlphaThe article also repeats the flawed remedy for avoiding "too big to fail" by limiting the size of banks. But this remedy assumes that bank failure is idiosyncratic or uncorrelated (i.e., that we can limit the size of that "one bad apple"). But that's not the situation we have because virtually all banks made the same mistakes and virtually all banks are exposed to the same macro-economic environment. Size limits won't matter if all banks use the same pricing models to invest in the same asset classes and those asset classes suffer a loss. The real solution is employ more conservative and more counter-cyclical reserve ratios (e.g, the higher the gross profits of the industry, the higher the reserve requirement).I don't think his point about 'too big to fail' institutions is the common one that you're refuting here (I also agree with your argument that size doesn't matter in a systemic failure scenario). Rather he suggests that banks that grow too big also grow to wield excessive political clout and thus are able to twist the economy-wide risk-management process in various unhealthy ways. If you had a more fragmented ecosystem consisting of a large number of smaller, competing institutions, conceivably, none of them would be able to exploit the system to the degree that, it seems, Goldman has been able to.You are right: Johnson's argument are more about political size than financial size. But what I find interesting is that the banking industry is really not that concentrated. Other industries (e.g. operating systems, air freight, soft drinks) have higher levels of concentration in terms of a very small number of big players holding the vast majority of marketshare. Yet few would say that FedEx or Coca-Cola are terrible oligarchs that are "to big to fail." Size, but itself, is not sufficient to be a source of excess political power.Larger numbers of smaller competing players won't significantly lessen political power if the behavior and interests of all the small firms are sufficiently correlated (see the farm lobby or retiree lobby for examples). Moreover, the prevailing source of the banks' political power is it not the size of the banks, but the depth of our debt. In many way its not any particular bank that have become to large, it's our dependency on banking as a whole that's become too large. As long as consumers, corporations, and government are so dependent on debt, they will be dependent on banking. To the extent that most consumers, corporations, and government have the ready capacity to retire their debts, the banking industry (and all banks large and small) will lose their grip over the government. Johnson thinks that the supply side of the credit industry has too much political power. But it is really the demand side (all the debtors) that provide that political power.

-delete-

QuoteOriginally posted by: Traden4AlphaPerhaps part of the problem (both the Fed's and my problem) is the continual underestimation of the scope of the problem (the Fed's problem) and the ease of hindsight (my problem).[\q]I suspect the contrary (at least in the case of the Fed). I think they have a very good idea of the severity of the problem. The issue is that they cannot afford to admit it publicly without scaring the horses. This is a large component of why their short-term liquidity/rates response has been so clear while their long-term banking structure/recap/nationalization response has been so unclear. The lack of long-term clarity is not just because congress, the administration and the oligarchs are involved but also because everyone wants to avoid more panic. QuoteOriginally posted by: Traden4AlphaYet few would say that FedEx or Coca-Cola are terrible oligarchs that are "to big to fail." Size, but itself, is not sufficient to be a source of excess political power.[\q]Oh, come on! Perhaps you should have substituted "GM" for "Coca-Cola"! I can assure you that, if Coca-Cola were going bankrupt and a large number of jobs were on the line, they would be bailed out. The politics of "too big to fail" are incontrovertibly influenced by size (and national icon status) and can, most certainly, be sufficient. Your point that leverage increases the effective eceonomic and political size of a company (or bank) is well-taken, though.QuoteOriginally posted by: Traden4AlphaJohnson thinks that the supply side of the credit industry has too much political power. But it is really the demand side (all the debtors) that provide that political power.I don't think one can separate these so readily (or at all, perhaps). Demand-side pressure makes legislators and regulators more susceptible to supply-side arguments that appear to support their constituents: up to a point, that is their job. This is an essential difference between democratic and non-democratic countries that Johnson delibrately glosses-over: in a democracy, the elites overreach to a great extent because the people implicitly want them to. QuoteFrom the Johnson article:But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector.[\q]This rather sums it up. You can almost use this as a definition of a bubble: everyone, be they politicians, bankers or hoi polloi, comes to believe that the financial sector is the best thing ever, and nothing must be allowed to stop the boom. Of course, this doesn't exonerate greedy bankers and traders or mitigate the (well-placed and nicely put) anger that Johnson (and I, for that matter) feels about where the burden for the mopping-up lies. But I think that he is failing to understand the endogeneity of power rather badly.

QuoteOriginally posted by: crmorcomQuoteOriginally posted by: Traden4AlphaPerhaps part of the problem (both the Fed's and my problem) is the continual underestimation of the scope of the problem (the Fed's problem) and the ease of hindsight (my problem).I suspect the contrary (at least in the case of the Fed). I think they have a very good idea of the severity of the problem. The issue is that they cannot afford to admit it publicly without scaring the horses. This is a large component of why their short-term liquidity/rates response has been so clear while their long-term banking structure/recap/nationalization response has been so unclear. The lack of long-term clarity is not just because congress, the administration and the oligarchs are involved but also because everyone wants to avoid more panic. I'll remain skeptical that the Fed truly grasps the depth of the problem and is concealing it to avoid panic. I find it hard to believe that the government financial community is so leak-proof that they could hide evidence of doom.What is more likely is that everyone wants a recovery so badly that they refuse to consider any evidence to the contrary. This is just a variant of the same delusions that create tulip/dotcom/housing bubbles. If something is too awful to imagine, then people stop imagining it!QuoteOriginally posted by: crmorcomQuoteOriginally posted by: Traden4AlphaYet few would say that FedEx or Coca-Cola are terrible oligarchs that are "to big to fail." Size, but itself, is not sufficient to be a source of excess political power.Oh, come on! Perhaps you should have substituted "GM" for "Coca-Cola"! I can assure you that, if Coca-Cola were going bankrupt and a large number of jobs were on the line, they would be bailed out. The politics of "too big to fail" are incontrovertibly influenced by size (and national icon status) and can, most certainly, be sufficient. Your point that leverage increases the effective eceonomic and political size of a company (or bank) is well-taken, though.That's a good point and it highlights another sticky issue. Perhaps we need industries to have too-big-too-fail members to create the political will to fix problems. If 100,000 small businesses each lay-off one person, nothing makes the news. But if one company lays-off 100,000 people, then we have front-page articles, "national discussions," Congressional hearings and the like.I know that government has a rather checkered past with respect to "managing" the economy, but the reality that different policies have different effects on different industries implies that one can't help but think of optimizing the effects of central action. As such, having some "too-big-to-fail" companies provides a locus for that thought process.QuoteOriginally posted by: crmorcomQuoteOriginally posted by: Traden4AlphaJohnson thinks that the supply side of the credit industry has too much political power. But it is really the demand side (all the debtors) that provide that political power.I don't think one can separate these so readily (or at all, perhaps). Demand-side pressure makes legislators and regulators more susceptible to supply-side arguments that appear to support their constituents: up to a point, that is their job. This is an essential difference between democratic and non-democratic countries that Johnson delibrately glosses-over: in a democracy, the elites overreach to a great extent because the people implicitly want them to. QuoteFrom the Johnson article:But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector.This rather sums it up. You can almost use this as a definition of a bubble: everyone, be they politicians, bankers or hoi polloi, comes to believe that the financial sector is the best thing ever, and nothing must be allowed to stop the boom. Of course, this doesn't exonerate greedy bankers and traders or mitigate the (well-placed and nicely put) anger that Johnson (and I, for that matter) feels about where the burden for the mopping-up lies. But I think that he is failing to understand the endogeneity of power rather badly.Excellent point! It was this grand alignment that gave so much incentive to ignore so many warning signs. A real estate bubble is so good for so many (especially the bankers) that it has no credible political foes.The deeper question and the reason to assign some of the political power to the demand side is in the joint responsibility for financial transactions. Although bankers are clearly the more sophisticated side of the transaction, information asymmetries reside on both sides. For example, the borrower has a far better insight into the borrower's job situation, career prospects, and home-improvement plans than does the bank. To some extent, the public failed in their due diligence in accepting unsustainable levels of credit and buying assets that had risen so quickly for so little reason. And having picked the borrow-and-spend lifestyle, the demand for ever greater volumes of credit created some of the political power of the financial services sector. That said, I do agree that it's hard to disentangle the web of interests because they were so strongly correlated.