Are you aware of any critiques or defenses of the financial industry that are better than the level of this post?
This actually stopped me from writing a similar comment to Benquo’s: I disagreed with the post, but was not really in its audience (I am, on net, probably pro-finance relative to the American public).
Like, I also thought the MBS were ridiculous because of skin in the game reasons, where there was widespread fraud in granting the mortgages, and a presumable contributor was that the granter was no longer on the hook for whether or not the mortgage was repaid. But more significant was that finance and government were conjoined twins, where the government could force everyone to make the same mistakes (I once went to a talk by a former bank CEO where he claimed that everyone is always in violation of some regulation, and so when the government wanted people to grant more mortgages, the regulators could just say “hey, the amount of slack we cut you will depend on how well you’re meeting the president’s minority lending targets”), and even more significant than that was a widespread belief that increased homeownership would cause more desirable behavior on the part of citizens, and upstream of that was widespread misunderstanding of causality (and statistics more generally; a study that showed that lenders were not biased against minorities (because their default rates were the same once you took credit score into account) was widely used to argue that lenders were biased against minorities).
Which is not the “hey, we should just increase reserve ratios” that Jacobian is responding to; he might disagree on the details (“how significant were minority borrowers to the crash, and how significant were attempts to increase minority borrowing to the erosion of lending standards?”) but he’s not going to disagree on the general thrust (“yes, governments should understand causality better”).
That said, I think the ‘free banking’ academic subdiscipline is of quite good quality and highly relevant to other projects you might be interested in, but is quite hard to get to from where we are now.
When I worked for Fannie Mae, company size was a big reason why some lenders got slack and others didn’t. A major “customer” (i.e. seller of loans) could easily get special exceptions to underwriting policies, but it often wasn’t worth anyone’s time to negotiate with small lenders, and each one has less negotiating leverage anyway.
Much like in the parable of the talents, unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.
This is a good reason to be worried about inequality, and more worried where the system seems opaque and mysterious.
Isn’t this an argument for encouraging more profitable banking (e.g., by eliminating capital requirements) so that banks could afford to give personalized attention to small borrowers? If banking is restricted, there’s only enough banking to go around for the big fish.
Sort of. With the kind of regulatory capture we have now, I don’t think we can assume that any plan like that will be done in a way that does what we want it to do, without a very close analysis of the specific institutions affected.
For example, it seems as though lower interest rates should have lowered the cost of living in a home. But instead they helped drive up prices where supply was inelastic until it was just as expensive. It also created a speculative bubble which led to the construction of many homes that eventually sat idle for a long time, not an obvious improvement in the use of capital. Wealth was transferred to incumbent homeowners, and intermediaries who make money on transaction volume. I worry that piecemeal deregulation like this would have analogous perverse consequences.
This might also just be trying to solve the wrong problem. If policymakers tried to make rules to keep the system stable, and then large actors used their bargaining power to extract profitable concessions that externalized costs onto the rest of the system, and then the system blew up in part because of those exceptions, it seems a bit strange to say that the problem is that small actors should have gotten a break too.
This actually stopped me from writing a similar comment to Benquo’s: I disagreed with the post, but was not really in its audience (I am, on net, probably pro-finance relative to the American public).
Like, I also thought the MBS were ridiculous because of skin in the game reasons, where there was widespread fraud in granting the mortgages, and a presumable contributor was that the granter was no longer on the hook for whether or not the mortgage was repaid. But more significant was that finance and government were conjoined twins, where the government could force everyone to make the same mistakes (I once went to a talk by a former bank CEO where he claimed that everyone is always in violation of some regulation, and so when the government wanted people to grant more mortgages, the regulators could just say “hey, the amount of slack we cut you will depend on how well you’re meeting the president’s minority lending targets”), and even more significant than that was a widespread belief that increased homeownership would cause more desirable behavior on the part of citizens, and upstream of that was widespread misunderstanding of causality (and statistics more generally; a study that showed that lenders were not biased against minorities (because their default rates were the same once you took credit score into account) was widely used to argue that lenders were biased against minorities).
Which is not the “hey, we should just increase reserve ratios” that Jacobian is responding to; he might disagree on the details (“how significant were minority borrowers to the crash, and how significant were attempts to increase minority borrowing to the erosion of lending standards?”) but he’s not going to disagree on the general thrust (“yes, governments should understand causality better”).
That said, I think the ‘free banking’ academic subdiscipline is of quite good quality and highly relevant to other projects you might be interested in, but is quite hard to get to from where we are now.
When I worked for Fannie Mae, company size was a big reason why some lenders got slack and others didn’t. A major “customer” (i.e. seller of loans) could easily get special exceptions to underwriting policies, but it often wasn’t worth anyone’s time to negotiate with small lenders, and each one has less negotiating leverage anyway.
Much like in the parable of the talents, unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.
This is a good reason to be worried about inequality, and more worried where the system seems opaque and mysterious.
Isn’t this an argument for encouraging more profitable banking (e.g., by eliminating capital requirements) so that banks could afford to give personalized attention to small borrowers? If banking is restricted, there’s only enough banking to go around for the big fish.
Sort of. With the kind of regulatory capture we have now, I don’t think we can assume that any plan like that will be done in a way that does what we want it to do, without a very close analysis of the specific institutions affected.
For example, it seems as though lower interest rates should have lowered the cost of living in a home. But instead they helped drive up prices where supply was inelastic until it was just as expensive. It also created a speculative bubble which led to the construction of many homes that eventually sat idle for a long time, not an obvious improvement in the use of capital. Wealth was transferred to incumbent homeowners, and intermediaries who make money on transaction volume. I worry that piecemeal deregulation like this would have analogous perverse consequences.
This might also just be trying to solve the wrong problem. If policymakers tried to make rules to keep the system stable, and then large actors used their bargaining power to extract profitable concessions that externalized costs onto the rest of the system, and then the system blew up in part because of those exceptions, it seems a bit strange to say that the problem is that small actors should have gotten a break too.