February 1, 2013
Blog friend EE has an article in National Review Online (well done, man!) on Reshaping Bank Incentives.
It's great in its own right, and it's EE. But what most grabbed me was that it solved a philosophical conundrum of mine. I gave Edward Conard's Unintended Consequences a five star Review Corner. And I'll stick by my lead paragraph: "Why didn't we nominate this Bain guy?"
Conard is a free market guy and smart as a whip. But Unintended Consequences advocates a huge role for the Fed and Treasury as lender of last resort. Without government playing JP Morgan's role, banks would have to devote too much capital to reserves, and growth would be stifled. Better to enjoy the benefits of liquidity -- and have Hank Paulson come in and mop things up after the party gets out of hand.
I know some ThreeSourcers are weeping in their cappuccinos over that last paragraph, but you have to accept the hossness of the source. It's a credible, Hamiltonian position, and Conard is no Karl Marx. He just accepts the Fed's maintaining guardrails. And I had no answer that was as sound economically as it was philosophically.
Until now. Hendrickson's "Double liability" strikes me as a free market answer to balance capital reserves with bank profits that facilitate growth. I wonder that you could not package the secondary assessments to shareholders as insurance and create a market for this risk (and trade derivatives off it, but I might be getting ahead of myself).
It is a thoughtful piece that contains a real solution and a free market solution to bank regulation.Economics and Markets Posted by John Kranz at February 1, 2013 9:10 AM