Too Fed to Fail

[Admiral Yi]

What are your thoughts on how they could do it and avoid economy damage?

Theoretically it should be simple enough: adjust lending rates up or down to adjust credit and money supply.  The problem to me is how do you create rigorous credit analysis, and insulate it from political pressure, in a governmental organization. 

[fhdz]

What are your thoughts on how they could do it and avoid economy damage?

Theoretically it should be simple enough: adjust lending rates up or down to adjust credit and money supply.  The problem to me is how do you create rigorous credit analysis, and insulate it from political pressure, in a governmental organization.

My guess is that instead of trying to insulate it, you would instead want to make it exceptionally transparent, such that political corruption is quickly visible and hopefully rooted out.

EDIT: By "it" I mean both the criteria and mechanisms of credit analysis.

[The Minsky Moment]

I may just be a stupid general practice lawyer, but why is this proposal superior to reinstating Glass-Steagall?

They are both variants on the narrow banking concept, but Glass-Steagall is a very kludgey and ineffective way of eliminating depositor risk.  It limits the types of risks banks can take on but not the magnitude.  So historically G-S coexisted with deposit insurance and neither eliminated moral hazard nor the occasional crisis.  G-S did not prevent the S&L crisis for example.  And even a hypothetical G-S plus that is even more strict wouldn't guarantee stability, because even if all banks do is simple maturity transformation, there is always interest rate and credit risk.

[The Minsky Moment]

Yeah, would consumer credit disappear if banks lost the "safe deposits" business? Presumably they'd charge whatever interest the market could bear for their services as long as there was a market for consumer credit...?

To respond to you and Yin, consumer credit and small business loans would continue to be provided on commercial terms.  Simple profit motive at work.  The government could still subsidize if it wishes.

[Neil]

I may just be a stupid general practice lawyer, but why is this proposal superior to reinstating Glass-Steagall?

For one thing, it would eliminate the temptation for the banks to push to repeal Glass-Steagall (again) or to otherwise find ways to steal people's money so that the bankers can get bonuses.

[The Minsky Moment]

The problem, rather, is whom the Fed would lend to and on what terms.

Presumably that wouldn't change.  The Fed wouldn't be providing credit to consumers.  Maybe very limited short-term overdraft facilities but nothing else.  The Fed could still provide credit to institutions as policy dictates.

[Iormlund]

2) it doesn't end up solving TBTF for the same reasons that Lehman's collapse was problematic even though Lehman wasn't a deposit taking bank. 

I thought the problem with LB is that threatened banks that did have deposits. That would not happen in this scenario.

[Admiral Yi]

My guess is that instead of trying to insulate it, you would instead want to make it exceptionally transparent, such that political corruption is quickly visible and hopefully rooted out.

EDIT: By "it" I mean both the criteria and mechanisms of credit analysis.

I'm not talking about political corruption per se.  I'm talking about whiny people whining that they're getting too high a rate compared to that guy, that women and minorities aren't getting their fair share, etc.  And think of the can of worms that would be opened when a borrower defaults to the Fed.

[The Minsky Moment]

2) it doesn't end up solving TBTF for the same reasons that Lehman's collapse was problematic even though Lehman wasn't a deposit taking bank. 

I thought the problem with LB is that threatened banks that did have deposits. That would not happen in this scenario.

The problem with LB was that it stood as counterparty on a vast amount of asset transactions, and thus threatened the solvency of many institutions.  Some of those were deposit-takers but that wasn't the key factor - rather the concern was to the integrity of the financial system as a whole.  The proof of that is the AIG bail-out, which was undertaken in significant part by US authorities to prevent contagion spreading to AIG's European counterparties, which obviously didn't have US depositors at risk.

[MadImmortalMan]

It would have a bit of a positive impact on TBTF from the standpoint that the ones capable of taking the Fed rate would not be limited like it is now. That would spread some risk around, I would think.

[Tamas]

Well, it is not like having the free choice over where to receive and keep your income is a big part of personal liberty, nor there is any risk to having a single state institution handle the finances of the entire population. Not to mention the complete lack of temptation of corruption and/or short-sighted populist political actions with that insane power over the citizens` savings. So I say go ahead.

[grumbler]

Well, it is not like having the free choice over where to receive and keep your income is a big part of personal liberty, nor there is any risk to having a single state institution handle the finances of the entire population. Not to mention the complete lack of temptation of corruption and/or short-sighted populist political actions with that insane power over the citizens` savings. So I say go ahead.

So you are arguing "go ahead" because you don't think it changes anything significant regarding of those concerns right now?  I can buy that.  The proposal vastly reduces the number of potential points of failure, without significantly increasing the changes of any one potential point of failure actually failing.

[Tamas]

Well, it is not like having the free choice over where to receive and keep your income is a big part of personal liberty, nor there is any risk to having a single state institution handle the finances of the entire population. Not to mention the complete lack of temptation of corruption and/or short-sighted populist political actions with that insane power over the citizens` savings. So I say go ahead.

So you are arguing "go ahead" because you don't think it changes anything significant regarding of those concerns right now?  I can buy that.  The proposal vastly reduces the number of potential points of failure, without significantly increasing the changes of any one potential point of failure actually failing.

I was being sarcastic  Now I admit there seems to be logic to having basic deposits with the Feds since they insure it anyways. But besides my above concerns I have a hard time believing "too big to fail" would stop to operate. Saving the asses of their own influence group (bankers and all) have been the top priority of the Fed, why would this change, if no decision makers or the way they make decisions change radically?

[grumbler]

I was being sarcastic 

There's nothing quite so fun as showing someone that their imagined hyperbole is actually just a description of the real situation. 

Now I admit there seems to be logic to having basic deposits with the Feds since they insure it anyways. But besides my above concerns I have a hard time believing "too big to fail" would stop to operate. Saving the asses of their own influence group (bankers and all) have been the top priority of the Fed, why would this change, if no decision makers or the way they make decisions change radically?

I have no idea what an "influence group" is, nor why a member of the Fed Board would want to "save the ass" of a random banker, but the Fed doesn't save the "too big to fail" banks, anyway.  That takes Congressional appropriations.  If you are arguing that the proposed changes don't effect the relationship between the major bank officers and the US Congress, then you are arguing way off the topic, and if you aren't arguing that, what, exactly, are you arguing?

[Tamas]

I think I will just cut this short and concede that you, again, won a match of the sport called Grumblerwinsinwhathecallsdebate. Knock yourself out.