QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: MartinghoulI would argue that the optimal course would be, in fact, to temporarily nationalize the banks, like the Scandis did. At the moment, all they're contributing to the system is added uncertainty. Afterwards, they need to be properly redesigned and gently introduced back into the wild...I like capitalism, per se, especially having experienced the heinous alternative first-hand. It's a practical paradigm that, currently, fits humankind best. However, it has its flaws. Specifically, what people have been discussing here, in various guises, is the problem of provision of public goods. For years we have been evading the basic contradiction that we treat banking and finance as a public good, but it's provided by the market. Ultimately, as we can see now, this doesn't fly. Which suggests to me that banks have to be redesigned to separate the utility bit from the other bits. The banking utility companies need to exist independently and be regulated completely differently (no fractional reserve lending, perhaps). Now, whether the utility bank functions properly, or is a pezza di merda, like the UK train system, is an entirely different question.My 2c (but pls take with a pinch of salt, as I am tired and it's late).Although I can see the attraction of tightly regulated full-reserve "utility" banks, I see two problems. First, no one would voluntarily put their money in a full reserve account. The behaviors of consumers and companies are what started us on the road to deregulation. Banks were being marginalized by the growing accessibility of yield-bearing instruments in the global financial markets. The ultra low cost of online transaction systems mean that it is drop-dead simple to replicate a saving or checking account that sweeps funds into the yield-bearing instrument (== fractional reserve instrument) of the depositor's choice. Unless you ban access to yield-bearing instruments, no one will use a utility bank.But the bigger issue is that this does not solve the problem unless we prevent consumers and companies from replicating fractional reserve activities. Any entity that can both borrow and lend assets simultaneously is acting as a fractional reserve entity (actually, any entity that can simultaneously accumulate both assets and liabilities will affect the economy as a fractional reserve entity). A fractional reserve entity doesn't have to be a bank, it can be a consumer that borrows against their house and puts the money in a CD or stock market. Part of the cause of this crisis was that the effective reserve ratios of consumers dropped too low when banks and mortgage lenders (including the government) allowed low-down-payment mortgages.There is nothing qualitatively wrong with fractional reserve. There is only the quantitative instability of it at low reserve ratios.Sorry to bring this back to the original subject ...Forget the fractional reserve thing, that was just a possibility. The idea is that these commercial banks should be a lot more conservative and a lot more regulated. I just found this really interesting speech by Volcker, who seems to agree with me. He also touches on a couple of other sensitive issues.Volcker Speech in Canada

QuoteOriginally posted by: MartinghoulSorry to bring this back to the original subject ...Forget the fractional reserve thing, that was just a possibility. The idea is that these commercial banks should be a lot more conservative and a lot more regulated. I just found this really interesting speech by Volcker, who seems to agree with me. He also touches on a couple of other sensitive issues.Volcker Speech in CanadaVolcker: "One of the saddest days of my life was when my grandson – and he's a particularly brilliant grandson – went to college. He was good at mathematics. And after he had been at college for a year or two I asked him what he wanted to do when he grew up. He said, "I want to be a financial engineer." My heart sank. Why was he going to waste his life on this profession?"Impressive! I'm also ashamed by how the finance community (globally, not only FEs) allowed this mess to happen.We better solve this shit so one day we don't have to say to kids: "I lived (actively) in the time of those fools that screwed your life"...

I just find it curious that 2 years ago, not many macroeconomist were preaching against the avalanche. But nowadays, they talk about the crisis in such detalis that sounds it was so obvious. All these "ad hoc" knowledge....In a few years I won´t be surprised if the same people defending this nationalization will be preaching against that.

QuoteOriginally posted by: HOOKI just find it curious that 2 years ago, not many macroeconomist were preaching against the avalanche. But nowadays, they talk about the crisis in such detalis that sounds it was so obvious. All these "ad hoc" knowledge....In a few years I won´t be surprised if the same people defending this nationalization will be preaching against that.Taleb writes about this. He calls it the "narrative fallacy" -- people create hind-sight explanations for the causes of the crisis. But their hindsight provides no foresight. Even if they regulate/correct the proximate causes of the problem, they always fail to uncover the deeper instabilities that create the next Black Swan. For example, why didn't Sarbanes Oxley and other post-dotcom, post-Enron measures prevent this crisis? You'd think that that the stock market crash in 2000-2001 would knock sense into people so we wouldn't have another crash just 7 years later.

QuoteOriginally posted by: MartinghoulSorry to bring this back to the original subject ...Forget the fractional reserve thing, that was just a possibility. The idea is that these commercial banks should be a lot more conservative and a lot more regulated. I just found this really interesting speech by Volcker, who seems to agree with me. He also touches on a couple of other sensitive issues.Volcker Speech in CanadaInteresting speech.I don't have as negative a view of "financial engineering" as Volcker does. (I also find it especially sad and distressing that Volcker and grandson couldn't hold a session of mutual education because I suspect that both parties could have learned much from the exchange) Yes, there are major problems in applying "engineering" to human systems. The mathematical and scientific methods that underpin an engineering discipline can (will!) fail in self-modifying, anticipatory human systems such as markets, financial systems, and economies. But the human element in markets and economies does NOT entirely invalidate an engineering approach, it just means that the notion of mathematical precision must be tempered by how incentives and profits can distort the math and the data that underpins the discipline. Realizing that rational equations can and do lose against irrational animal spirits should temper the hubris of those that think math, physics, science, or engineering can work on economies. In other words, I'd not throw the baby out with the bath water even if the baby is especially immature and has taken a rather large and smelly dump in the world's collective economic diaper. Instead, I'd use the financial engineering tools but throw in generous safety factors and heuristics that reflect the simple fact that we know a great deal less than we think we know about the markets. Volcker also misses a key issue when he decries the supposed opacity of financial engineering. It's not that the math created opacity, it's that it created the illusion of transparency to those that understood the math. Quant finance converted a known unknown (i.e., the risks of mortgage pools) into what practitioners thought was a known known (i.e., the output of the equations for pricing mortgage-backed securities). In theory, the math actually increased the transparency in the system by attempting to model correlation from proxy data (e.g., commonly-reported prices rather than rarely observed credit events). Prior to developing that math, the risk was a known unknown and if I know that I don't know the potential pay-offs of an instrument, then I can make prudent choices. But if I think that the outcomes are transparent due to either a pricing formula or due to a hedging formula, then I can (and will) use much more leverage. Yet the math also created what became for most managers, investors, and regulators, a catastrophic unknown unknown (i.e., the instability of correlation, especially in the context of the limited datasets available). (We'll not discuss how our favorite yellow-suited crusader failed to convince the flocks of global villagers of the danger of the default-breathing correlation dragon!) The point is that the sequence of events was: known unknown (risk) -> data -> math -> seeming transparency -> confidence -> leverage -> more data confirming the original data (i.e., housing only went up) -> more confidence -> more leverage -> -> -> BOOM! I call this the curse of transparency because what-you-see-is-NOT-what-you-get.Another area that I more strongly disagree with Volcker is when he recommends having a smaller number of larger, regulated banks. That seems like an "put your eggs in one basket and then watch that basket" strategy. It's not surprising that a central banker would gravitate to a centralized solution (if you spend you life as a hammer .....). But what I find interesting is that it's the biggest banks that have created the most trouble for the financial system. Maybe I'm wrong and maybe all the shoes have not yet dropped, but it seems that bank failures to date have been concentrated among the very large and the very small. In contrast, mid-sized, super-regional banks have weathered the storm better than their larger or smaller competitors. That small banks fail in a downturn is no surprise -- they are simply less diversified by the very nature of the smaller numbers of accounts on both sides of their balance sheets and by their local nature. That large banks fail more than mid-sized banks is worth some thought and suggests more caution before advocating Volcker's one-watched-basket-of-behemoths strategy.The more insidious danger of regulation is that it actually replicates the same category of strategy that caused this problem in the first place (i.e., the strategy of creating illusory transparency). Regulation attempts to convert of known unknowns (e.g., risks of bankruptcies in the financial system) into known knowns (e.g., adequate reserves, Basel N standards, certified risk management processes, etc.). That's laudable goal, I'm sure. Like the elegant math behind all the toxic assets du jour, this regulation will be well-intentioned, well-thought-out, and 100% likely to create new well-hidden unknown unknowns. The danger isn't in the unintended consequences per se, but the the scale of them.My concern is in preventing single-point vulnerabilities in the global financial system. I see such vulnerabilities in the excessive sizes of institutions, excess centralization of regulation, and the excessive use of a single formula (model monocultures) in any market. The first two are relatively easy to prevent. The last is a far trickier beast that probably calls for more of what Paul advocates -- that people think for themselves.

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: HOOKI just find it curious that 2 years ago, not many macroeconomist were preaching against the avalanche. But nowadays, they talk about the crisis in such detalis that sounds it was so obvious. All these "ad hoc" knowledge....In a few years I won´t be surprised if the same people defending this nationalization will be preaching against that.Taleb writes about this. He calls it the "narrative fallacy" -- people create hind-sight explanations for the causes of the crisis. But their hindsight provides no foresight. Even if they regulate/correct the proximate causes of the problem, they always fail to uncover the deeper instabilities that create the next Black Swan. For example, why didn't Sarbanes Oxley and other post-dotcom, post-Enron measures prevent this crisis? You'd think that that the stock market crash in 2000-2001 would knock sense into people so we wouldn't have another crash just 7 years later.T4A, thanks very much. Only now I could understand properly the narrative fallacy. I wasn´t clear for me when I read the Black Swan. Cheers