If there were a regulatory Richter scale that measured the shaking of the financial system, the 2010 Dodd-Frank Act would register about 8, while the 2011 Basel III framework might be a bit above 7. (For reference, the 1906 San Francisco earthquake was a 7.8). Fortunately, this shaking is mostly for the better – helping to make the financial system more resilient in the long run.
The new “Bailout Prevention Act” of Senators Vitter and Warren also might be an 8 on the shaking scale, but it would be a true disaster, because it undermines the Fed’s role as crisis lender of last resort. In contrast, the Senate Banking Committee’s new discussion draft of a “Financial Regulatory Improvement Act of 2015” is probably a 2 or a 3. If enacted, it will be “felt slightly by some people” but probably won't do much damage...
We find your WSJ op-ed (Wednesday, May 6) misleading, short-sighted, self-serving, and very disappointing.
Vanguard has been in the forefront of providing low-cost, reliable access to U.S. and global capital markets to millions of customers, including ourselves. Following the financial crisis of 2007-2009, the firm naturally should be a leader in promoting a more resilient financial system. Your op-ed sadly goes in the opposite direction.
Senior Advisor, Pew Charitable Trusts and Chairman, Systemic Risk Council; former Chairman, Federal Deposit Insurance Corporation; former Assistant Secretary of the Treasury for Financial Institutions; former Commissioner of the Commodity Futures Trading Corporation; and former Counsel, Senate Majority Leader Robert Dole.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Chairman Bair: It has made me more – not less – worried about the considerable power of the Fed. I am more concerned about how extensively their power has been used and could be used in the future, and the way that power has and could disrupt markets now and in the future.
Zero interest rates have gone on for far too long. We had a crisis that was based on solvency problems: banks and households were borrowing too much. They needed to go through a process of deleveraging. Monetary policy cannot address that...
James Joo-Jin Kim Visiting Professor of Korean Studies, University of Pennsylvania; former Governor, Bank of Korea.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Governor Kim: The answer is yes, indeed. I say this from the perspective of a former Governor of the Bank of Korea. Until late 2011, the Bank had a single mandate: to maintain price stability. Following the global financial crisis, the National Assembly of the Republic of Korea revised the Bank of Korea Act by stipulating that, as the central bank works to secure the objective of price stability, due consideration must be paid to maintaining financial stability...
GE’s planned sale of its financial division – GE Capital – looks like a home run for systemic regulators. It adds to a string of recent announcements that big intermediaries are responding to improved financial oversight. Deutsche Bank’s decision to shrink its investment banking business and sell Postbank is another example, as is the more general pruning of oversized balance sheets elsewhere: UBS assets are now less than half the pre-crisis level.
If the regulatory reforms in the United States and elsewhere really work to reduce systemic risk, the list of Systemically Important Financial Institutions (SIFIs) would become an historical artifact: either these financial behemoths become safer, or they go out of existence...
When President Nixon and Chairman Mao shook hands in Beijing in 1972, only 17% of the 862 million Chinese lived in urban areas and the entire stock of housing was state owned. Today, more than half of China’s 1.4 billion residents live in cities, while 9 out of 10 households own their homes. Unsurprisingly, this housing revolution has brought with it a property price boom. Over the past decade, urban land prices have risen more than four-fold, with high flyers like Beijing surging by a factor of more than 10 (for the data, see here).
Will China follow the same path the U.S. took in the last decade? Will China’s boom turn into a bust?...
Has the experience of the crisis changed your view of the central bank policy toolkit?
Governor Subbarao: Most certainly. Post crisis, I believe, the central bank toolkit has expanded in three important dimensions: (i) deployment of unconventional monetary policy by way of quantitative easing (QE); (ii) extensive use of forward guidance; and (iii) use of macroprudential policies to maintain financial stability. Each of these policy tools has spawned a vigorous debate on its appropriateness and effectiveness. Let me briefly refer to the contours of those debates.
The ongoing difficulties in Greece – combined with the ECB’s dramatic actions to ward off deflation – are distracting attention from what may be the euro area’s biggest and most pervasive problem: debt.
You wouldn’t know it from the record low level of government bond yields, but much of Europe lives under a severe debt burden. Nonfinancial corporate debt exceeds 100 percent of GDP in Belgium, Finland, France, Ireland, Luxembourg, Netherlands, Portugal, and Spain. And, gross government debt (as measured by Eurostat) is close to or exceeds this threshold in Belgium, France, Greece, Ireland, Italy, Portugal and Spain...
Senior Fellow, Institute for New Economic Thinking; former Chairman, U.K. Financial Services Authority; and former Chairman, Financial Stability Board Standing Committee on Supervisory and Regulatory Cooperation.
Has the experience of the crisis changed your view of the central bank policy tool kit?
Chairman Turner: Yes. A lot. The pre-crisis orthodoxy defined central banks to a very significant extent as having one primary objective – low and stable inflation (with some countries in addition including a broad employment mandate) – and one policy tool, the policy interest rate. I think that this definition involving a very small set of objectives and one policy tool was fundamentally mistaken...
Economists and policymakers are on a quest. They are looking for the elixir that will protect their economies from financial crises. Their strategy is to find an indicator that provides an early warning of collapse, and then respond with preventative measures.
We think the approach of waiting for warnings is seriously flawed. The necessary information may never be in our grasp. And even if it were, our ability to respond rapidly and effectively is far from clear. Rather than treating the symptoms of illness after they start to develop, we believe the better strategy is early immunization: the more resilient the financial system, the less reliance we will have on faulty or nonexistent warnings...
