Comments on: Ratings Reform: The Franken Amendment and Structured Products

By: Blog Profile: Macroresilience « Financialfreezeframe's Blog

Blog Profile: Macroresilience « Financialfreezeframe's Blog — Sat, 05 Jun 2010 10:31:31 +0000

[...] He also points out the problems with credit rating agencies and structured products: [...]

By: zanon

zanon — Fri, 04 Jun 2010 23:24:46 +0000

The issue you raise is a good one.

Another strategy would be to ban securitization. That way, the person doing the credit analysis would also hold the credit risk. Ratings agencies don’t care if the are right or wrong — they get paid either way. The lender does not care if the loan will be paid back, so long as he can securitize the loan and get it off his book.

In mortgage market, for example, there was no securitization in 1950s and yet, somehow, the US was able to produce plenty of houses for all, actually more than in recent boom I believe. So why bother with this at all?

Deposit insurance is the one thing in the banking system that actually almost works correctly, and even it is badly implemented as it should be infinite. Removing it is terrible idea.

By: admin

admin — Fri, 04 Jun 2010 06:59:51 +0000

David – That’s an idea I can definitely support! The harder part in my view is how we go about removing the implicit protection to other bank creditors post Lehman, and even more tricky is the moral hazard created by the Greenspan put variant of monetary policy which tries to bail out all asset prices in times of stress.

By: David Merkel

David Merkel — Fri, 04 Jun 2010 04:17:23 +0000

My favored way of removing deposit protection is to raise FDIC premiums high enough that some banks begin to drop out of the FDIC. I would have the secondary impact that it would bail out the hole in the FDIC’s balance sheet.

By: admin

admin — Thu, 03 Jun 2010 22:52:03 +0000

“Time consistency” is just academic jargon to say that the promise not to protect the banks must be credible. The regulator can always say that he will not intervene but when push comes to shove, he will be tempted to do so. In order to avoid this, he has to tie his own hands up in some manner.

On how to remove the protection, that is the golden question and I don’t have a post on any solutions. Clearly deposit insurance needs to be removed but more importantly a significant proportion of debt in banks needs to be contingent capital, if not all debt. But the exact details of such a contingent capital system are tricky to figure out and more importantly, any transition needs some wholesale amendments to past contracts.

By: Sandrew

Sandrew — Thu, 03 Jun 2010 22:38:51 +0000

Do you have a post somewhere explaining how to credibly remove the public protection provided to the banking sector? I don’t see a way absent a constitutional amendment. Also, what do you mean by “in a time-consistent manner”?