I though readers might welcome an antidote from the nonsense that bank industry touts like the Office of the Comptroller of the Currency’s John Walsh routinely puts forth.
I’ve known Amar Bhidé, who is now a professor at Tufts, for thirty years; we both worked on the Citibank account at McKinsey (although never on the same study). He’s long had a reputation for being incredibly smart and iconoclastic.
Amar enjoys annoying people by saying completely commonsensical things that are not acceptable and watching chaos ensue. The last occasion I witnessed first hand was at a dinner party with a lot of finance journalists and markets professionals in attendance. Amar matter of factly said Obama blew it by not having a one week bank holiday to get to the bottom of how bad a mess the biggest banks really were and making needed interventions (which presumably could include resolving them). Consternation ensued: virtually everyone save yours truly argued that there would be a revolution because people would not be able to access their money market funds (no, I am not making this up, this was pretty much the only objection voiced, but it was made with considerable energy).
Now there are some legitimate concerns to be raised about the Bhidé plan (what happens to the Eurodollar market? What happens if any banks have payments on bonds held by foreigners due during the week when they are shuttered? What if Citigroup’s foreign depositors freak out? Are you sure the government can resolve either Citi or Bank of America if they were deemed to be terminal?). But instead all this group did was effectively recoil and say, “No, you can’t do that. The world would come to an end.” This reaction was testament as to how successful the banks have been in conditioning the elites to act as their mouthpieces.
Bhidé also managed the neat trick in his recent book, A Call to Judgment, of annoying both the right and the left. He uses Hayek to argue that that banking industry has evolved in a way that leads to bad decisions and it now destroys value on a large scale. He calls for a return to what he depicts as “primitive banking” and it has a lot in common to the utility banking model we have discussed here. And Bhidé, who was briefly a proprietary trader and continues to be a successful investor, really means “primitive”. For instance, he thinks stocks should not be publicly traded; the only relationship that makes any sense for a legal promise as ambiguous as that of equity ownership is a venture capital/private equity relationship, where the investor knows the management of the company and is meaningfully involved in its affairs.
I suspect readers will enjoy this interview. Bhidé pretty much calls JP Morgan a criminal enterprise, although in context, he is merely citing that bank as typical of the industry. He also very clearly says CEOs are not in control of these enterprises and that the engage in activities that “can’t be managed, can’t be examined.” That of course begs the question of why these corporate chieftans are so well paid. We argued in ECONNED that the major capital market firms were engaged in looting and that top management was at best hostage to the producers (the business unit managers) and at worst, in cahoots. Bhidé’s gloss might strike some readers as unduly charitable. However, if the top brass is incapable of doing its job, that means the banking industry needs to be radically restructured.
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The idea that the Dodd-Frank bill has gone down the wrong path is exactly correct; it is a diversion designed to kick the can further. The banks should be utilities.
“…if the top brass is incapable of doing its job, that means the banking industry needs to be radically restructured.”
Priceless discretion. Or you could say, understatement of the the last few centuries -since the French revolution ‘off with their heads.’
Just a little walk down memory lane to add a little perspective, and common sense, which seems to be in critically short supply these days:
Again and again during the preceding year or two there had been local bank panics; the Federal Reserve had come to the rescue, RFC money had been poured in, and a total collapse had been averted. Now a new panic was beginning, and it was beyond the power of these agencies to stop. Perhaps the newspaper publication of the facts about RFC loans was a factor in bringing about this panic—though to say this is to beg the question whether a banking system dependent upon secret loans from a democratic government is not already in an indefensible position. Probably the banks would have collapsed anyhow, so widely had their funds been invested in questionable bonds and mortgages, so widely had they been mismanaged through holding companies and through affiliation with investment companies, so lax were the standards imposed upon them in many states, and so great was the strain upon the national economy of sustaining the weight of obligations which rested in their hands. At any rate, here at the heart of the national debt-and-credit structure a great rift appeared–and quickly widened.
[….]
…In The “Folklore of Capitalism”, Thurman W. Arnold tells of a conversation he had, before the bank panic, with a group of bankers, lawyers, and economists. They were one and all aghast at the possibility of a general bank closing. “My mind,” said one of them, “fails to function when I think of the extent of the catastrophe that will follow when the Chase National Bank closes its doors.” Mr. Arnold told his friend Professor Edward S. Robinson about this conversation, and found him unaccountably cheerful. “Do you think,” asked Professor Robinson, “that when the banks all close people will climb trees and throw coconuts at each other?” Mr. Arnold replied that this seemed to him a little unlikely but that a bank crash of such magnitude suggested to him rioting and perhaps revolution. Whereupon Professor Robinson said, “I will venture a prediction. . . . When the banks close, everyone will feel relieved. It will be a sort of national holiday. There will be general excitement and a feeling of great interest. Travel will not stop; hotels will not close; everyone will have a lot of fun, though they will not admit that it’s fun at the time.”
Despite the fact that indirectly the bank holiday brought new distress, through new curtailments of business and new layoffs, and intensified the suffering of many people who were already hard hit, Professor Robinson was essentially right. The majority of Americans felt a sense of relief at having the lid of secrecy blown off. Now everything was out in the open. They felt that this trouble was temporary. They felt no shame now in being short of money–everybody seemed to be. They were all in the same boat. And they responded to one another’s difficulties good-naturedly.
The grocer lent credit (what else could he do?), most hotels were glad to honor checks, shops were cordial about charge accounts. The diminished advertising columns of the newspapers contained such cheerful announcements as “IN PAYMENT FOR PASSAGE WE WILL ACCEPT CHECKS OR PROPERLY AUTHORIZED SCRIP” (this was in the early days of the bank holiday, when the issue of clearing-house scrip appeared likely); “RADIO CITY HAS CONFIDENCE IN AMERICA AND ITS PEOPLE– until scrip becomes available our box offices will accept checks”; “WE WILL TAKE YOUR CHECK DATED THREE MONTHS AHEAD for a three months’ supply of Pepsodent for yourself and your family.”
True, the shopping districts were half deserted; on the upper floors of department stores, clerks were standing about with no customers at all; there was a Saturday air about the business offices, trains were sparsely filled, stock exchanges and commodity exchanges were closed. But in the talk that buzzed everywhere there was less of foreboding than of eager and friendly excitement. “Are they going to put out scrip?–and how do we use it?” “What’s a ‘conservator’–is that a new word?” “You say you had thirty dollars on you when the banks closed? Well, you’re in luck. I had only three-fifty–I’d planned to go to the bank that morning.” “They say the Smiths stocked their cellar with canned goods last week–three months’ supply; they thought there was going to be a revolution!” “Did you see those pictures of the gold hoarders bringing bags full of gold back to the Federal Reserve Bank? Those birds are getting off easy, if you ask me.” “Mrs. Dodge beat the bank holiday all right–overdrew her account last Friday. No, not intentionally. Just a mistake, she says. Shot with luck, I call it.” “Stop me if you’ve heard this banker story: it seems that a banker died and when he got to the gates, St. Peter said. . . .”
To this public mood President Roosevelt’s first fireside chat was perfectly attuned. Quiet, uncondescending, clear, and confident, it was an incredibly skillful performance. (According to Raymond Moley’s “After Seven Years”, the first draft of this chat was written by Charles Michelson of the Democratic publicity staff; Arthur Ballantine, Under Secretary of the Treasury for Hoover, completely rewrote it; Roosevelt revised it.) The banks opened without any such renewed panic as had been feared. They might not have done so had people realized that it was impossible, in a few days, to separate the sound banks from the unsound with any certainty, and that errors were bound to be made. The story goes that one bank had been in such bad shape that its directors decided not even to put in an application to reopen; through a clerical slip this bank was put on the wrong list, received a clean bill of health, and opened with flying colors! In some places, to be sure, there were bank runs even after the opening–runs which had to be met unquestioningly with Federal funds, lest the whole trouble begin over again. And so many banks had to be kept shut anyhow that ten per cent or more of the deposits of the country were still tied up after March 15, and the national economic machinery thus remained partially crippled. On the whole, however, the opening was an immense success. Confidence had come back with a rush; for the people had been captivated and persuaded by a President who seemed to believe in them and was giving them action, action, action.
The New Deal had made a brilliant beginning.
▬Fredrick Lewis Allen, Since Yesterday
the first fireside chat:
http://www.americanrhetoric.com/speeches/fdrfirstfiresidechat.html
“….After all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people themselves. Confidence and courage are the essentials of success in carrying out our plan. You people must have faith; you must not be stampeded by rumors or guesses. Let us unite in banishing fear. We have provided the machinery to restore our financial system, and it is up to you to support and make it work.
It is your problem, my friends, your problem no less than it is mine.
Together we cannot fail.”
ah, more important than currency, more important than gold, the confidence of the people themselves.
have we passed the tipping point where this is irrecoverably gone–for a generation? or two? or forever?
is the social breakdown, the breakdown of trust, really already a fait accompli, just not yet fully apparent/manifested?
is our government irreversibly captured?
at what point have we lost our social fabric to the extent that any spark will ignite the conflagration that will lead to WW III?
looks like trust will continue to break down and a key question is just how long this will continue–before the people, or the government, moves genuinely to try to halt the decline and begin the rebuilding of trust, with the hope (only hope, probably, at that point) that it is not too late?
will we wait until we have lost our social fabric to the extent that any spark will ignite a conflagration that will lead to WW III? exactly what hells will our children have to live through before trust, in a workable form, is rediscovered and rebuilt?
will the captive government and the laughing bankers ever wake up to the real nature and extent of what is at stake in their reckless games?
sorry for the repetition in the above.
Bank, brokerage or insurance company: decide.
When we hear about high crime areas, we might think about Ciudad Juárez or Somalia, but the fact is… Wall Street probably has the highest concentration of criminals and crimes comitted in the entire world – especially if you take the legal concept of personhood into account.
Of course… these “people” are massive habitual offenders incapable of reform.
We let them get away with admitting no wrongdoing, but we don’t make the penalties hurt. We should be talking about fines in years of profit, not days. Would they risk years of profit?
Homicides per 100,000 residents:
Chihuahua 74
Durango 60
Sinaloa 47
Guerrero 46
Washington DC 29
Baja California 24
Oaxaca 21
Sonora 20
Morelos 19
Michoacán 18
Nayarit 15
▬http://www.prominix.com/sblock/admin/images/Mexico%20Crime%20Stats%202010.pdf
▬Crime Rate by State, 2006
Oops! Screwed that first link up. I’ll try again:
Mexico: Crime Rate Traffic Light 2010
Well if we want to talk about deaths, then we should consider externalities. :-)
Excellent argument by Bhidé. Given his emphasis on the lack of requisite knowledge, I suspect that John Gray would nod with approval, given what he wrote in this classic essay:
http://www.lrb.co.uk/v31/n22/john-gray/we-simply-do-not-know
That was a good essay and reminds me why I am always sickened by the people who attack Keynes because of what they believe “Keynesianism” is instead of, you know, actually reading what Keynes wrote.
I know people want to desperately believe otherwise, but there is no solid evidence that this Keynes quote is incorrect: there is no ‘basis on which to form any calculable probability whatever. We simply do not know!’
As Gray notes, “For Keynes, markets are unstable less because they are driven by emotion than because the future is unknowable.”
Listen, the future *is* unknowable. I know most everyone wants to believe differently, but those beliefs are no less kooky than every crazy alien or religious cult out there. Just because someone “predicted” the future a couple times is *not* proof. It’s not. Get over it.
“For instance, he thinks stocks should not be publicly traded;”
I’d disagree. I think all financial instruments should be handled just like the flower market/dutch auctions. No 24-hr futures trading, no 6.5 hour trading day—two dutch markets, one in the morning and one in the afternoon.
Why?
The problem with public ownership isn’t excess liquidity (per se) and sub-sec trading. It’s the disconnect of ownership/responsibility and the action. Under public ownership it is all too common that the “owner” of the company is not really an owner – at least not in the sense of controling. Under most circumstances the shareholders have little or no influence, meaning that the major control is coming from the top management (who, of course, can and do treat it as an nice option to make money).
Non-public is not arguing that shareholders should be executives – but that the executive “branch” should be held to account by board of shareholders, not
I’d argue that even the PE/VC model would not work as long as the PE/VC representatives would be agents for PE/VC super funds (as compared to medium-to-small funds, where losing one investment means noticeable hit to all PE/VC partners.)
As a matter of fact, I’d go even further, and argue that no corporate over certain size (we can discuss size) should be allowed to use limited liability structure. LL is a construct to encourage formation and evolution of new companies. Large companies are, almost by definition, past this stage, and as a result should not enjoy the protection. In fact, I’d limit allow the limited liability option only to newly formed companies fully controlled by physical persons and either only for a limited time from incorporation (say 10 years) or until revenue of (abitrary) $10m per year is achieved.
At a minimum share buybacks should be illegal.
I have been saying this for years.
“Excess capital” is used to buyback shares (goosing the stock price so executives can exercise options), then when the balance sheet implodes, the taxpayer is forced to cough up to replenish capital.
Completely criminal.
There’s a great deal of agreement here and elsewhere in the blogosphere that what’s going on is criminal.
But what are we doing about it? Some schmuck named Paul Allen says “I messed up. I messed up big…There was no excuse for my behavior,” (no kidding) and he gets 40 months in prison. Supposedly. Let’s see. Who ever heard of his company: Taylor Bean & Whitaker? Not me. I’ve hardly heard of Ocala, Florida where this company was based. http://www.huffingtonpost.com/2011/06/22/mortgage-fraud-ceo-prison-paul-allen_n_881946.html
I want Jamie Dimon. I want Lloyd Blankfein. I want Hank Paulson and Timmy Geithner. On the stand, taking the oath, being cross-examined, convicted and put behind bars for the rest of their lives. I want all the rich people who look up to these bozos to quake in their boots.
Enough with the penny ante stuff. Paul friggin’ Allen? C’mon.
One handy thing about our new executive dictatorship: Putin had no problem dealing with his oligarchs. Get the right guy in there and he’ll clean this mess right up over a nice cup of thallium tea.
I agree Bhide completely. The crooks in a bank aren’t advertising their misdeeds. They are sugar coating them to look legit. As they say, the devil is in the details.
Breaking news! This just in!
On Tuesday, June 21, the United States launched a massive military attack on the country of Uruguay, first a bombing campaign, followed by an invasion of ground troops.
The assault began with a wave of devastating ballistic missile strikes on Montevideo, beginning early Monday morning, June 19th. This attack killed at least 118 people, according to initial reports, mostly civilians, or at least 137 dead, according other sources. Hundreds of people were also injured, and many of them later died.
Explosions from US missile strikes occurred throughout the day in several areas of Montevideo, mostly in the downtown area and including the crowded, central outdoor marketplace. Two of the missiles exploded outside one of the city’s hospitals, the Sanatorio, Punta del Este. According to official sources about 30 to 35 people died at the hospital; a correspondent for AFP counted 27 bodies, most of them women and newborn babies.
In a statement, the White House regretted the loss of life but said that the attack on Montevideo was necessary in order to “protect the interests of Citigroup and advance American values”.
Addressing the issue of women and newborn babies killed in the attack, Obama gave an incredibly moving speech in which he referred to them as “rain puddles in heaven”. Ezra Klein gave it two thumbs up and said this was probably Obama’s finest hour. Robert Siegel of NPR said the speech moved him to tears and bore comparison to Churchhill’s “Blood, Sweat and Tears” speech in the early stages of World War II.
While a majority of economists applauded these attacks as necessary to promote economic reforms in Uruguay, a handful of MMTers wondered if targeting maternity hospitals is really the most efficient method to employ.
This just in, an AFP update as of 9:30 AM June 22, 2011: A rain of large ball-shaped shrapnel from US cluster munition airbursts showered the downtown market in Montevideo, nearby streets, and open-air cafes, with each blast affecting a large area and killing dozens of people.
A Reuters reporter Maria Eismont counted at least 90 bodies on the scene, while the local AFP correspondent said he witnessed 17 corpses recovered from the market.
In a statement, the White House said today’s attacks are in order to protect the “universal rights” of JP Morgan as well as the people of Uruguay.
The Pentagon just released this footage from the attack on Uruguay (sponsored by JP Morgan, Citigroup and Bechtel):
http://www.youtube.com/watch?v=ZpvLCptAHT8
“The very definition of the real becomes: that of which it is possible to give an equivalent reproduction…. The real is not only what can be reproduced, but that which is always already reproduced. The hyperreal.”
– Jean Baudrillard “The Hyperrealism of Simulation” (1983)
It is all symptomatic of “winner take all capitalism”.
When people wonder what rationale has driven the transformation of our culture over the past 50 years, it is right there.
The adoption of moral relativism, the embracing of the cult of the individual and the “dumbing down” of the masses all served their purpose. And that purpose was to allow the “winners” to take it all and be able to say they earned it and deserve it.
Amar Bhide touched on eliminating fractional reserve banking. Indeed! But at the very least we should remove any government support for FRL such as a lender of last resort (the Fed) and legal tender laws for private debts. Then banks would be greatly limited in the amount they could leverage.
Then, if businesses needed finance, they could:
1) Pay honest interest rates for government money.
2) Create their own money such as store coupons, futures contracts, etc.
3) Raise money via common stock issuance.
Our money system is inherently dishonest and unstable. It cannot be regulated as history repeatedly demonstrates.
If you take Bhide’s point as true, the only question is whether it is possible to create a more manageable chaos out of the unending banking nightmare.
The ironic thing about the theory he’s drawing on is that it suggests that the magnitude of the task may outstrip the ability of even a highly skilled and well-managed reorganization effort. If the situations are so large and complex that all the insiders are basically in the dark, then it may be that they are too large and complex to be understood by outsiders, too.
It’s always cool to refer to the limits of rationality. Never goes out of style. If only we were rational enough to determine whether or not a situation is too complex for rational analysis!
A shell game isn’t complicated, isn’t it? When a MSM writer starts tossing about phrases like “complex algorithms that no one understood” and other horseshit, he’s a defender of the status quo – why writers accept such bitch-work is beyond me, perhaps they are taking the right combination of drugs so as to not “worry” themselves.
As if the Bonanno crime family had scientists in lab coats devising their loansharking apparatus.
“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius — and a lot of courage — to move in the opposite direction.”
A. Einstein
“Amar enjoys annoying people by saying completely commonsensical things that are not acceptable”
lol. capital adequacy really is BS in a system run by shadow-banks. its one of those things where you go “jesus, thats so obvious, why didnt anyone notice it before?”
Cheers for sharing this Yves. Mr Bhidé strikes a much-needed blow at the cognitive dissonance thriving heartily, but not only, in the USA SEZs of Beltway and Manhattan.
On second listening, the “Soviet” bit is catchy and apt *but* maybe Mr Bhidé could find a similar short-hand for the demographic reality that “capitalism” was born and flourished in an era of demographic pyramid, but as the super-organism urbanizes it seems to be shifting to demographic rectangle.
Along the lines of DeSoto’s call for property rights, might it make sense to insist on right to invest in narrow banking?