Heartily agree - but the time for writing about it is over.Pledge: whatever these clowns buy, we'll sell more of.....until they give up, or are forcibly removed.
Terrific. As a former fairly senior regulator, I can't agree more.
Brilliant simply brilliant.
Anyone have any specific advice / recommendations on buying physical gold (i'm in the UK and Scandinavia). many thanks cp
I'm sorry, but i prefer stability.A car designed for stability protects the occupants. A car designed for resiliance protects itself. I'd rather drive the former.
atleast cite nassim taleb if you are gonna rip off his speech
To further your metaphor, one might say the the roads have been designed to promote stability, but we are all careening about too quickly in overburdened, cumbersome, shoddy vehicles. Accidents happen.
How does one apply the principle of resolution to bankrupt nations?
Financial stability is an unfortunate objective, agree. But using resilience and resolution risk replacing something vague with other vague terms. The key is to ask why this became an objective in the first place. This was primarily because central banks became obsessed with inflation targeting, and therefore we got this segregation of tasks which frankly is blurring what their purpose is. Central banks should be the guardian of the monetary system, and as long as banks issue liabilities accepted on par with cash, the job of the cb is to preserve the trust in the currency, i.e. making sure that the issuers of money are safe and sound, and that the real value of the currency is preserved. There is now a greater awareness of this among central bankers, and a recognition that "the art of central banking" require a more broad based approach than just inflation targeting or financial stability.
But the current definition of financial stability is explicitly not zero failure (living wills would be rather useless if that was the case); it may have accidentally been that in the early 2000's because regulators underestimated both the probability and impact of failure, but that was not intentional. This article would have been useful 5 years; now, it is ill-informed.
If we are talking about one or two failures, then I agree. Even if we are talking about an S&L crisis, with lots of small failures, you are still right. The problem comes when enough systemic banks fail, or are close to failing, at once. Then there are no competitors willing to take the assets at any price. Now you might argue, and I would agree, that the answer is to have fewer if any systemic banks, and to regulate those so they are very very unlikely to fail, assuming that the latter is possible; again, I would agree. But the fact remains than in the situation the authorities found themselves in post Lehman there were too many asset potentially being liquidated and too few buyers.
It is necessary for the Too Big To Fail banks to be downsized (i.e. broken up via trust-busting) first. I love the idea. I wish the author had mentioned this part of the equation.
Resilience and resolution are the outcome of utter transparency in the financial system.When banks have to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details, there is no place to hide risk or bad assets.As a result, you get the resilience and resolution you are looking for.With regards to the bailouts..., to a very significant degree they reflect the fact that the regulators do not want to admit just how badly they did at protecting the financial system.
Very useful article. I would add the key point that is not often discussed is ask any capital markets type "how much leverage can you put on an asset?"; the likely response is "it is inversely proportional to volatility or some measure of extreme loss". Basically, the result of lowering systemic volatility is an increase in leverage and a reduced ability to deal with shocks when they come. This is the mess the world is in now and there are no easy answers. That is why I believe too much stability is a bad thing.
@ JohnIf "stability" means incumbent bias, as I suspect, then it may not be your stability that the authorities are concerned about. @ Anon 21:56I was unaware of any speech Taleb gave on this topic when I wrote this, but would welcome a link to post as an update.@ Anon 22:18"Resolution" of bankrupt nations typically starts with default on unsustainable debts. As someone at FT Alphaville reminded us a few months back, Germany defaulted three times in the last century, each time recovering and growing strongly afterwards.@nbtgm1I agree that the scope of central bank activity has grown much too wide and ill-defined - and almost completely lacking accountability. Largely this is because democratically elected politicians have proven inept at addressing difficult economic choices, and few have been willing to challenge the laxity or largesse of presumed "experts" at the central banks. There needs to be a first principles re-examination of roles and responsibilities in a balanced, market economy.@ Anon 22:41 and 22:51It remains a fact that no EU country has allowed a bank to fail with losses to depositors above the insurance limit and unsecured creditors/bondholders - with the exception of Denmark (Amagerbanken) and the UK (Southsea Investment and Mortgages). Denmark and the UK are outside the eurozone, obviously, although this should not be a determining factor in moral hazard.@ Anon 22:59I thought of proposing that any resolution break up the failed bank into at least three units for sale to promote better competition, but have not thought this one through enough. I agree some trust-busting or limitations on M&A are needed to downsize dominant institutions and promote competition.@ RichardI strongly agree that transparency is central to improved performance and accountability. Most of the innovations of the past 25 years have been aimed at creating information asymmetries to the benefit of core market participants, impoverishing everyone else. I'm thinking in particular here about market fragmentation as more trading moved off-exchange, and derivatives - which have been instrumental in disguising performance since first abused by Japanese banks a generation ago. These information asymmetries have driven the inequalities on returns on investment between financial and non-financial enterprises. Better transparency would deliver better allocation of capital throughout the economy, and better outcomes for non-financial firms and individuals.
@ Anon 09:30Excellent point.
"Resiliency" is indeed better than stability, but is much easier said than done. A resilient financial system will not panic globally if things get weird locally. But what if the system panics anyway? You've then got no choice but to head for stability--system meltdown won't do.And resolution isn't all that easy, either. There is a pretty broad consensus that ordinary insolvency law won't work for financial firms.Give me plausible details on resiliency and resolution, and I'll gladly abandon stability.
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