Brandl March 19 2010 Talk


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Thanks to the Texas Evening MBA and Texas Executive MBA programs for sponsoring my talk on options for financial market reforms.

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Brandl March 19 2010 Talk

  1. 1. The options for financial reform. <ul><li>Michael W. Brandl, PhD </li></ul><ul><li>The University of Texas at Austin </li></ul><ul><li>McCombs School of Business </li></ul><ul><li>March 19, 2010 </li></ul>
  2. 2. The need for reform <ul><li>The “Great Recession” that started in 2007 was trigger by a global financial crisis. </li></ul><ul><ul><li>Clearly there need to be structural reforms of our financial system. </li></ul></ul><ul><ul><li>The business press seems more interested in the “politics” of financial market reform than the key issues. </li></ul></ul><ul><ul><ul><li>What is a manager to do? </li></ul></ul></ul><ul><ul><ul><li>Where to turn for information? </li></ul></ul></ul><ul><li>We will examine: </li></ul><ul><ul><li>Basic ideas: Tobin Tax & The Volcker Rule </li></ul></ul><ul><ul><li>Restructuring ideas: LPB, John Taylor, The Basel Group, Simon Johnson, Niall Ferguson, and Lord Turner. </li></ul></ul><ul><li>You decide… </li></ul>
  3. 3. The Tobin Tax <ul><li>The idea – James Tobin originally suggested in 1972 a tax “of about 0.5%” on FX transactions. </li></ul><ul><li>2010 version: Sarkozy of France, Brown of the UK are suggesting a global Tobin tax on all financial transactions. </li></ul><ul><ul><li>Those in favor : the tax would: a) raise tax revenue to pay </li></ul></ul><ul><ul><li>for past bailouts, b) increase cost of speculative trading, c) be </li></ul></ul><ul><ul><li>a sales tax on financial markets. </li></ul></ul><ul><ul><li>Those against : the tax would: a) be passed </li></ul></ul><ul><ul><li>onto “Main Street”, b) force a massive sell off </li></ul></ul><ul><ul><li>of stocks, c) tax those that did not speculate. </li></ul></ul><ul><ul><li>Most likely outcome: European Parliament </li></ul></ul><ul><ul><li>is pushing G20 to adopt it in June 2010 meetings. </li></ul></ul>
  4. 4. The Volcker Rule <ul><li>The idea – forbid institutions that have access to the Fed facilities from undertaking proprietary trading. </li></ul><ul><li>2010 version : President Obama named it after Paul Volker. </li></ul><ul><ul><li>Those in favor : creates a wall between those entities involved in the payment system and those who want to take on more risk. </li></ul></ul><ul><ul><li>Those against : difficult to determine what is “proprietary” trading; unclear what role this played </li></ul></ul><ul><ul><li>in the current crisis; banks will find ways </li></ul></ul><ul><ul><li>around it. </li></ul></ul><ul><ul><li>Most likely outcome: it’s likely dead. </li></ul></ul><ul><ul><li>Dodd said “it should be studied…” </li></ul></ul>
  5. 5. Limited Purpose Banking <ul><li>The Idea: banks and insurance companies would become mutual funds. They would not be allowed to borrow to invest. All transactions are settled through a Federal Financial Authority. </li></ul><ul><ul><li>Those in favor : individuals take on risk not the institutions. Larry Kotlikoff (BU) & Ed Leamer (UCLA) </li></ul></ul><ul><ul><li>No need for FDIC insurance – cash mutual funds to insurance mutual funds. </li></ul></ul><ul><ul><li>Those against : LPB ignores what depository institutions do: a) maturity transformation, b) disability and c) solve asymmetric information problem… </li></ul></ul><ul><ul><li>what about consumers – will they be </li></ul></ul><ul><ul><li>able to understand the choices? </li></ul></ul><ul><ul><li>Most likely outcome: slim to none… </li></ul></ul><ul><ul><li>no one in Washington is discussing it. </li></ul></ul>
  6. 6. John Taylor <ul><li>Stanford economist (Taylor Rule of monetary policy) </li></ul><ul><li>Idea: need a database on the interconnections of the financial markets – who is lending to whom? </li></ul><ul><li>Need simple rules/law based process for liquidation (Chapter 11F) not another regulator. </li></ul><ul><ul><li>Those in favor: Gov’t ad hoc bailouts & lack of </li></ul></ul><ul><li> transparency created uncertainty and crisis. </li></ul><ul><ul><li>Those against: Who is going to enforce </li></ul></ul><ul><ul><li>this? Fed got us into this mess </li></ul></ul><ul><ul><li>and can’t be relied upon to protect </li></ul></ul><ul><ul><li>consumers – they only worry about </li></ul></ul><ul><ul><li>the financial industry. </li></ul></ul>
  7. 7. The Basel Group <ul><li>Collection of international bank regulators </li></ul><ul><li>Suggests government need contingency plans for failures of specific banks & insurance plans. </li></ul><ul><ul><li>“ Living wills” will be required for all systemic institutions. </li></ul></ul><ul><li>Governments should co-ordinate national rules and share information. </li></ul><ul><ul><li>Those in favor: forward looking & global in focus. </li></ul></ul><ul><ul><li>Those against: regulators may be reluctant to use the “living wills” due to political pressure and thus we would be back to tax-payer bailouts and uncertainty. </li></ul></ul><ul><ul><li>Most likely outcome: keep on eye on this…it’s likely. </li></ul></ul>
  8. 8. Simon Johnson <ul><li>MIT Sloan economist & author </li></ul><ul><ul><li>“ The Quiet Coup” The Atlantic May 2009 </li></ul></ul><ul><li>The Idea – bankers & fin mkts have far too much political and social power “intellectual capture.” </li></ul><ul><li>2010 version: break up big banks, </li></ul><ul><li>regulation since Reagan has gone wrong, replace TBTF with “small enough to fail.” </li></ul><ul><ul><ul><li>Those in favor: historical proof of ongoing </li></ul></ul></ul><ul><ul><ul><li>political and social battle. </li></ul></ul></ul><ul><ul><ul><li>Those against: size of the institutions is not </li></ul></ul></ul><ul><ul><ul><li>What matters, it is management and regulation. </li></ul></ul></ul>
  9. 9. Niall Ferguson Reforms <ul><li>The idea – most suggested reforms are little more than window dressing. Excessive leverage, toxic assets, reckless insurance of risk, excess incentives for homeownership and China’s FX policies are the causes. </li></ul><ul><li>Suggestions: Flat tax of 25%, VAT 7.5-10% and lower corporate tax. Tax spending not income. </li></ul><ul><ul><li>Those in favor : sound structural reforms </li></ul></ul><ul><ul><li>Those against: Krugman & DeLong - </li></ul></ul><ul><li>doesn’t address Wall St bonuses; </li></ul><ul><li>doesn’t understand the importance </li></ul><ul><li>of consumption spending. </li></ul>
  10. 10. Lord Adair Turner <ul><li>Chair of British Financial Services Authority </li></ul><ul><ul><li>Britain's top bank regulator </li></ul></ul><ul><ul><li>Called recent financial innovations “socially and economically useless.” Quoted Keynes’ “fetish of liquidity” </li></ul></ul><ul><ul><li>2010 version: Tobin tax, higher capital requirements, max loan/value ratios and Macro-prudent committee – 2 yr review </li></ul></ul><ul><ul><li>Those in favor: structured financial products do not need liquidity as do fx mkts </li></ul></ul><ul><ul><li>Those against: too many </li></ul></ul><ul><ul><li>regulators already; Tobin tax </li></ul></ul><ul><ul><li>is unworkable; need to break-up </li></ul></ul><ul><ul><li>Big institutions (Tories) </li></ul></ul>
  11. 11. Where we are now… <ul><li>Senate Banking Committee will debate Dodd’s “proposal”: </li></ul><ul><ul><li>New Consumer Financial Protection Bureau in the Fed </li></ul></ul><ul><ul><li>Financial Stability Council: A systemic risk regulator made up of Treasury, Fed, SEC, FDIC, CFPB, etc. </li></ul></ul><ul><ul><li>Resolution Authority: Council of regulators headed by FDIC would work out resolutions of TBTFs. </li></ul></ul><ul><ul><li>Securitizers would have to maintain 10% of risk (House bill is 5%) </li></ul></ul><ul><ul><li>Bank employees past/present can not be Fed directors </li></ul></ul><ul><ul><li>No leverage limit (House version cap 15:1) </li></ul></ul><ul><ul><li>Small banks (under $50m) regulated by FDIC not Fed </li></ul></ul><ul><li>Not much difference btw Dodd and House version… </li></ul>
  12. 12. Q&A twitter: michaelbrandl Facebook: michaelbrandl