By Martin Wolf
Published: January 26 2010 20:32
Today, the people see in the financial sector not the skilful hands of erstwhile masters of the universe, but the grabbing hands of greedy ingrates. It is little wonder, then, that a desperate President Obama, battered by the voters in Massachusetts, has turned upon a group even less popular than his party. He has duly added the axe of Paul Volcker, 82-year-old former chairman of the Federal Reserve, to the regulatory scalpel offered by his Treasury secretary, Tim Geithner.Mr Volcker is proposing a version of the distinction between commercial and investment banking brought into the US by the Glass-Steagall Act of 1933. In announcing his new proposals last week, Mr Obama referred to a “Volcker Rule” that “banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers”. Furthermore, added the president: “I’m also proposing that we prevent the further consolidation of our financial system.”
The politics of this are easy to understand. The rescue of the financial system has succeeded. But borrowing by every sector, except government, is negative. How far this is because the financial sector does not wish to lend or the non-financial sector does not wish to borrow is unclear. I assume both forces are at work. As the McKinsey Global Institute reminds us in a recent report, deleveraging can take many years. The contrast between strong finance and a weak economy is inevitable in the early stages of the post-crisis recovery. It is also desperately unpopular.
However understandable the politics, it is far less evident that the proposed change is good policy.
One issue concerns the process. After a couple of years in which the world has focused on very different remedies, the most powerful government of all has introduced new and unsettling ideas. If the ideas are good, this uncertainty need not be that costly. But if the result is to make it more difficult either to pass reform in the US or to agree reform with other countries, the costs could be high. The uncertainty injected into the financial system, at a time when predictability has returned, could be the biggest cost of all.
Another issue is that at least some of these reforms – and possibly all of them – are going to prove inapplicable outside the US and so create difficulties of international co-ordination. Many continental European countries, for example, are not only wedded to the universal bank model, but like very big banks. It might be possible to persuade them to accept a separation of proprietary trading from other activities. But limits on size are, I suspect, out of bounds. The question, then, is how such rules might work for what are now global institutions.
Yet the biggest issue is whether Mr Volcker’s ideas are in themselves good. Are these new proposals desirable, workable and relevant?
On the first of these, my answer would be: yes. It is desirable that institutions are prevented from exploiting explicit and implicit guarantees in order to make speculative investments of little economic benefit. The spectacle of businesses prospering from activities from whose consequences they have had to be rescued and from whose impact the public is still suffering is distressing. Again, it would clearly be much better if it were possible to wind up financial institutions without excessive disruption, because they are not too large or because they are not too interconnected with the rest of the financial system.
Then, are these ideas workable? Here doubts begin to arise. Would it really be possible to draw and, more importantly, police a line between legitimate activities of banks and activities “unrelated to serving their customers”? If institutions were encouraged to lend to customers, would they be allowed to securitise and sell those loans? Would they be allowed to hedge the risks of lending? If not, why not? If yes, when does this become speculation? Again, how is size to be measured for a global bank? Would it be relative to the global market, to the market in each country it operates in or in some other ways? And what would happen to foreign banks operating in the US?
Finally, there is the biggest question of all – that of the relevance of these ideas. There is no doubt that deposit-taking institutions are special. They perform irreplaceable services for the public and the economy. But, as experience has now taught us, the vast parts of the financial system that evolved, particularly in the US, partly in order to get round capital requirements designed to make banks safer, are of vital importance, too. As Paul Tucker, deputy governor of the Bank of England, noted in an important recent speech, “shadow banking” also had to be rescued. Any institution that promises to redeem its liabilities on demand, while investing in longer-term or riskier assets, has bank-like characteristics and is vulnerable to a run. The list turned out to be long: money market funds; finance companies; structured investment vehicles; and securities dealers (such as Lehman). As Mr Tucker notes, money market funds alone were as big as the transactions deposits of all US banks.
It is, alas, not the case that the US government can credibly promise to make banks safer, while leaving this vast forest of shadow institutions to the market. That would only be possible if it could separate banks from the shadow system and did not care what happened to the latter. So if governments are indeed to pursue structural reform, they would need to be substantially more radical.
Moreover, the question of relevance arises in other ways, too. In this crisis, at least, banks’ investments in hedge funds, private equity and even proprietary trading were simply not the core of what went wrong. Again, while it is easy to rail against big banks, the failure of a small, highly interconnected institution, Lehman, proved vastly important. Indeed, it triggered the rescue of the entire global system.
I admire Mr Volcker and strongly support his desire to develop a financial sector that supports the wider economy, rather than makes vast profits out of activities so likely to destabilise it. Equally, I agree that part of the solution is indeed structural. But these proposals are, in important respects, unworkable, undesirable and irrelevant to the task at hand. The president may indeed be desperate. But much more work is needed.
Copyright The Financial Times Limited 2010.
0 comments:
Publicar un comentario