Monday, October 1, 2012

Current events

Jonathan Weil at Bloomberg:

How to Lose Weight Fast the Deutsche Bank Way

Deutsche Bank had 2.24 trillion euros ($2.84 trillion) of assets on its June 30 balance sheet, which was prepared using the International Accounting Standards Board’s rules. Yet the company said it had only 372.6 billion euros of risk-weighted assets. That’s the figure it used to come up with a 10.2 percent capital ratio for regulatory purposes.

So, somehow Deutsche Bank made 83 percent of its assets disappear, which really is all you need to know to realize that the whole Basel construct is a sham.

Simon Johnson at The Baseline Scenario:

Restoring The Legitimacy Of The Federal Reserve

The Federal Reserve has a legitimacy problem. Fortunately, a potential policy shift is available that offers both the right thing for the Fed to do and a way to please sensible people on both sides of the political spectrum: raise capital requirements for megabanks.

Okay with me. The banks should be safer. But why focus only on boosting capital requirements to cover the assets? Why not focus also on reducing bank assets? Burn that candle at both ends. Make those too-big-to-fail banks smaller.

The debt we owe to banks, for banks, is assets. We can reduce bank assets by reducing our debt. Reduce our debt. How? Now, since the crisis? Just write it off. But in a normal economy -- that's what we have to do, we have to think in terms of a normal economy, if we ever hope to have one again -- reduce our debt by relying less on credit.

Rely less on credit by relying more on cash. You know, they can print it.

No, stop it. Printing is money is not the problem. It could be the problem, yes. But it's not the problem. The problem is excessive debt. Excessive private sector debt. And the reason we have excessive private sector debt is that policy wanted it to happen.

See, everybody knows that credit makes the world go 'round. Credit makes the economy grow. We know it. And any time we -- meaning Congress -- any time they want to show they're doing all they can to make the economy grow, they do things to encourage more lending and more borrowing and more accumulation of debt.

Did you really think it was natural, all this debt we have?

If you don't like the idea of starving banks by borrowing less, maybe it's because you know you depend on credit.

I know it, too. But I'm not saying that borrowers like me are the problem. I'm saying economic policy is the problem. The thinking behind economic policy is the problem. The thinking that thinks no amount of debt is a problem. The thinking that thinks we can accumulate debt forever. The thinking that thinks it's a good idea to suppress the quantity of cash money to fight inflation, while forever encouraging the use of credit money and the accumulation of debt. That thinking is the problem.

Higher capital requirements for banks?


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