Tuesday, February 17, 2009

An Excellent Read...

Silence due to travel, family business and obligations, all have taken precedence. Lots to say, just no time to say it, as the ratio of drafts to posts continues to increase uncomfortably.

Yet, amidst the decided market gloom, extreme pessimism of real economy data points, to the ultra-tail of pessimism (note: don't read this if you can't handle it), former bank analyst, John Hempton has prepared a fine and measured multi-dimensional analysis of systemic solvency in Bank Solvency and The Geithner Plan that is a must-read. It is not that it is optimistic. It isn't. But in comparison to tin-foil hat brigade's offerings, it is a welcome bit of sobriety. I am not alone in thinking this, as Dr James Hamilton at Econobrowser used Mr Hempton's post as a basis to Meditate on The Prospects for the US Banking System. It is, in any event, a welcome change from contemplations of a return to a neolithic existence, a Mad-Max or Blade-runner-esque future imminently awaiting us. So enjoy, and if you;ve comments, do please post them directly to the original post at Bronte Capita, or the link at Econobrowser where they'll be in better company and receive due review. In the meantime, I'll return to my Campari & Soda and the arcane study of French Property Law.


Anonymous said...

Orlov's "Closing the Collapse Gap" presentation is an interesting read. I wonder though if he has omitted an important difference - the complete lack of public will to support the status quo ante under the Soviet system?

Arcane said...

Are you having problems with French Property Law? Let your readers know, you may be suprised who might be able to help point you in the right direction.

Mencius Moldbug said...

It's nice to see some starting to understand that the price for "toxic assets" is a matter of interest rate, not just risk.

Bottom line is: you haven't fixed the financial system until your new financial system equates the market supply of loans, with the market demand for loans, at every point along the maturity curve.

Only designs meeting this criterion can produce a free-market interest rate which is stable - or at least as stable as (a) the monetary system and (b) the actual productive structures of the economy.

I like Hempton's post and Hamilton's, because they show some intuitive understanding that there is a market price trying to emerge from a command economy here. However, they remain quite far from understanding the structure of the problem or the solution space.

Every banker in the world understands that a breakdown in maturity transformation, aka a bank run, is at least somehow involved with this crisis. Every banker in the world understands that this practice is in some sense dangerous, because it involves creating the illusion that the world contains more money, at any time T, than it really does.

What almost all fail to understand (understandably, because the practice is at present the basis of their profession) is that "borrowing short and lending long" is not an epicurean habit which should be practiced in moderation but not excess, but a bad habit of which any level is too high. Ie: not red wine, but crack.

Or for a more flavorful metaphor, the banker's theory of MT is that MT is like the temperature of Goldilocks' soup: you can have too much MT, not enough MT, or just the right amount of MT.

This is true for leverage. It is true for default risk. But MT or "liquidity risk" is more like the level of fecal coliform in Goldilocks' soup.

Then, of course, the State comes along and sprays some Febreze in the soup, in the form of free loan guarantees for maturity-transforming bankers. Whoo hoo! Cheap debt for everyone! Thank you, State. Dunno what we'd do without ya.

Bron said...

Could not have said it better myself, Mencius Moldbug.