Capital Markets

Friday May 10, 2013********************************************By Lou Barnes In a week without economic news, markets very quiet, take time for the foibles, flights, fantasies, and filberts of public policy and human nature. Whenever the hard right and hard left agree, duck and cover. One example: the right and left both want to intervene in Syria. The right confuses war with video games, and hasn’t learned a thing since Vietnam. The left is oblivious to contradiction: violence is good if for humanitarian cause, exit optional. On another front, left and right are joined in shouting, one-up competition to see who can do the most damage. To banks, credit, and the economy. The right despises modern banking because it’s a government scheme. The Fed is a conspiracy. Government won’t allow losses, the punishment that keeps people in line. Won’t break up big banks and go back to the good old days of small-town bankers saying “yes” to the right kind of people. And the right hates all those mister-fancy-pants and electronic money. Even the right wearing fancy pants hates the fancy-pants. The left hates banks and bankers because they have money and won’t give it to people who don’t have any. The left has exactly the same fondness for the safe, small-bank world which didn’t supply enough credit, and wasn’t safe. Left and right agree that taxpayers should not bail out bankers. Bankers should pay. And the left hates fancy proprietary trading, securities underwriting, and derivatives, which neither left nor right knows from prostates, undertakers, or dirigibles. No, we’ve got an agenda and we’re stickin’ to it. Fannie and Freddie are now earning profits at a $50-billion annual pace. Shut them down. They will repay the Treasury within three years, and with FHA and VA provide 90% of new mortgages. Shut them down. We don’t like big. Little banks we could let go. Two problems with that: in 1929 we had a lot of little banks, all caught the same disease, and 75% of them died before we thought to stop it. Taxpayers who might have saved everything just by promising a back-stop instead lost everything. You still want to bust up the big guys? Wells, Citi, Chase, BofA, and Goldman (not so big, but everybody hates Goldman)? Want to just dump the pieces on the market? Want another crash? Who is going to buy the pieces? The French. Maybe the French will buy the pieces. Okay, okay… than make them stop doing dangerous things. Like making money? You give deposits to a bank and expect a return, both interest and principal. To make money with your money your bank has to invest in something that you don’t know how to or are scared to or should be. “Make loans,” right and left say. To whom? Safe credits sell their own bonds. Safe stuff — Treasurys — doesn’t pay anything. Every other investment or loan entails risk that must be managed with sophisticated tools. Forcing banks to raise more capital is wise, but in the hands of right and left any good idea gets overcooked. “Risk-based capital” is today such piling-on that banks are forced to shed useful businesses. Both wings are fond of “bail-in,” the European plan for assisted suicide: demand that banks simultaneously raise capital from investors and tell those investors that in the next systemic run they’ll get the Cyprus Haircut. The joint assault on banks misses the one worthwhile target: CEOs, directors and chairmen. Could we import some new, ethical, and polite ones from Canada, where giant banks have worked very well? The new governor of the Bank of England is a Canadian recruit. Send the casino-ego boys packing. Fed governor Tarullo published a paper on the Fed’s site that’s hard to read, but describes the extraordinary and real progress made in reforming banks since 2008, and the exceedingly careful pace. Careful not for benefit of bankers, but depositor-taxpayers and the society. Haste makes new bank runs. Net of huge losses and paying back TARP, US banks have raised $400 billion in new capital in just four years. Never mind. From left and right, Rand Paul to Elizabeth Warren: break them up and shut them down. Business starved of credit hides under desks, eyes wide at the scene.