Macro econ and dumb pronoucements
So I was reading this article, and thinking about how much it echoed a general sentiment that it's not the Fed's fault they missed and didn't prevent the asset bubble which is now correcting, and how they would be unable to do so in general, and by extension the bailout is unavoidable. That's BS, IMHO, and I'll explain why.
It may be the case that the Fed will never be able to prove an asset bubble, but what they can certainly do (and absolutely should do) is ensure that banks and proxy banks have enough reserves to cover conceivable shifts in asset valuation. If any bank is in danger of failing and "too big to fail", it's a failure in the oversight of the Fed.
You can absolutely project potential asset valuations based on historical averages and probability distributions. You can figure out what the worst-case scenarios are, and make sure any bank (investment or otherwise) which is "too big to fail" has adequate reserves for the worst-case scenario.
- "But I can't make enough money keeping that much in reserve; it's too much of a burden." Divest until you're not too big to fail, then do whatever you want to make money speculating.
- "It's unfair to only force large banks to play by these harsh restrictions." See previous answer.
- "It's too expansive to account for all the complex investments which large banks have to figure this out." The banks should have the data, and if they don't, they need to divest themselves until they can comprehend their business. If they are going to have implicit federal backing, they should have comprehensive financial information.
- "This would force all banks to be size-constrained to below the 'too big to fail' cutoff." Here we get to financial nirvana, where the Fed doesn't have to spend taxpayer money to bail out any business which takes on too much risk, because they can all fail.
Anyway, that's how I think the Fed could/should eliminate the "too big to fail" syndrome in the market, and in doing so allow speculative bubbles to correct themselves without requiring a taxpayer bailout. Better plans are of course welcome; but "nothing we could do" from the Fed should be rejected for what it is: BS.
It may be the case that the Fed will never be able to prove an asset bubble, but what they can certainly do (and absolutely should do) is ensure that banks and proxy banks have enough reserves to cover conceivable shifts in asset valuation. If any bank is in danger of failing and "too big to fail", it's a failure in the oversight of the Fed.
You can absolutely project potential asset valuations based on historical averages and probability distributions. You can figure out what the worst-case scenarios are, and make sure any bank (investment or otherwise) which is "too big to fail" has adequate reserves for the worst-case scenario.
- "But I can't make enough money keeping that much in reserve; it's too much of a burden." Divest until you're not too big to fail, then do whatever you want to make money speculating.
- "It's unfair to only force large banks to play by these harsh restrictions." See previous answer.
- "It's too expansive to account for all the complex investments which large banks have to figure this out." The banks should have the data, and if they don't, they need to divest themselves until they can comprehend their business. If they are going to have implicit federal backing, they should have comprehensive financial information.
- "This would force all banks to be size-constrained to below the 'too big to fail' cutoff." Here we get to financial nirvana, where the Fed doesn't have to spend taxpayer money to bail out any business which takes on too much risk, because they can all fail.
Anyway, that's how I think the Fed could/should eliminate the "too big to fail" syndrome in the market, and in doing so allow speculative bubbles to correct themselves without requiring a taxpayer bailout. Better plans are of course welcome; but "nothing we could do" from the Fed should be rejected for what it is: BS.
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