Anybody who reads this blog with some frequency will notice that I in general am a big fan of blogger Matt Yglesias and his work. That said, I have some deep disagreements with him about his latest article about bank dividends.

The final paragraph really sums up some of the concerns he has been blogging about in regards to the solvency of the finance industry.

Yglesias:*

But my point—following Admati and Hellweg—is that regulators shouldn’t just look over JP Morgan’s shoulders and second-guess its investment decisions. Regulators shouldn’t let JP Morgan go so deeply into debt. Or, rather, given that JP Morgan is already deeply in debt they should make it get out of debt. Which shouldn’t be difficult. JP Morgan is profitable. Those profits can be used to pay dividends to JP Morgan shareholders. But they could also be used to reduce JP Morgan’s level of indebtedness. Then JP Morgan managers would be playing less with creditors’ money and more with shareholders’ money. That would make it much less likely that any given bad trade would lead to a bankruptcy scenario. It would let us worry less about second-guessing JP Morgan’s trades, and just be more confident that whether or not they screw up the financial system can stay strong and steady. And contrary to banker myth, blocking banks from becoming so indebted wouldn’t reduce their ability to lend—it would reduce their ability to return profits to shareholders.

*emphasis mine.

Yglesias wishes that regulators (the OCC the CFPB or the FDIC) could force a bank to become less indebted. Except that they already do this!

Banks can be issued issued things called, “consent orders“. Basically what these do is state to the public that the offending bank has been notified that it’s behavior in lending or management of funds has been outside the accepted practice for a lending institution, and that they have a certain amount of time to complete a redress of these offenses. In the most severe cases, banks are banned from providing new credit to borrowers until their existing booked loans are up to snuff. That the regulatory bodies of the United States chose not to do this with JP Morgan is an entire issue in it’s own right; however, let’s not act as though those powers are not totally within the wheelhouse of the regulatory officials.

Further, in my opinion, there are ‘banks’ and then there are ‘Banks’. (notice the capitalization).  Small instituions like thrifts (formerly saving and loan associations) or small commercial banks should be talked about differently than the larger ‘Banks’, ie JP Morgan, Wells, BofA et al. Larger banking houses tend to have a larger portfolio and balance sheet because they use many more financial tools and do much more trading with much more sophisticated instruments that require  a lot of supervision (hence the OCC).

Whereas, if a small commercial bank, “Mom & Pop Local Bank” as Yglesias uses in his example, were to give out dividends to stock owners of the bank, and the bank is in a reasonably healthy position then why shouldn’t it make use of the extra cash on hand. Part of keeping the confidence of investors to me seems that investors like knowing they’ll get at least the money they put in the bank back, but that they see a return on that investment. Otherwise, why put the cash in banks at all? Why not invest in another company or industry? Because returns on stock bolsters confidence. Granted, banks shouldn’t always do this, regardless of size, but to be opposed in principle of the idea that people don’t get a dividend despite investing seems a little off to me.

The Economist’s Free Exchange posted a fun read on the evolving role the Fed plays in discussions of monetary policy. In the past, the Fed had been pretty cloistered in its speeches to the public at large, and Fed transcripts are still released in 5 year lags.

However, since the onset of the Great Recession, there have been more calls to the Fed to provide clarity in the face of high unemployment and crushingly small inflation. The Chicago Fed called for ‘Forward guidance”. Basically this idea is that the Fed will guarantee their decisions will hold until the economy meets a certain threshold. Now while the threshold that Evans (the Chicago Fed President) wanted has not been agreed to, Chairman Bernanke has been more forthright in his acknowlegement that QE3 with a forward guidance can be effective.

Money quote:

Until 1994, the Fed avoided announcing its decisions until well after the fact. Since then, the central bank has become much more transparent about its intentions, deliberations, and forecasts. Some analysts, like Henry Kaufman, argued that this was a mistake, for similar reasons as Messrs Adrian and Shin. Meanwhile, most central banks stopped paying attention to quantity measures like the monetary and credit aggregates more than two decades ago. There were good reasons why that happened, but new and improved quantitative measures may prove to be more helpful than the price measures (interest rates, credit spreads, etc.) currently favoured.

 

Every week I listen to Slate Magazine’s Political Gabfest. I always look forward to what the three hosts, David Plotz, John Dickerson, and Emily Bazelon, include at the end of the podcast for their topics of conversation at their weekly cocktail parties. Being a fan of both cocktail chatter and cocktail parties, I decided to riff on that theme and add my weekly top three stories that I think would be great conversation pieces at weekly cocktail parties.

  1. Abraham Lincoln was also a pardon hunter.
  2. Chats with Adam Pally of Happy Endings.
  3. Tom Hardy’s Star Trek: Nemesis screentest is better than the actual film.

Every week I listen to Slate Magazine’s Political Gabfest. I always look forward to what the three hosts, David Plotz, John Dickerson, and Emily Bazelon, include at the end of the podcast for their topics of conversation at their weekly cocktail parties. Being a fan of both cocktail chatter and cocktail parties, I decided to riff on that theme and add my weekly top three stories that I think would be great conversation pieces at weekly cocktail parties.

  1. Kristen Stewart broke Rob Pattinson’s heart.
  2. Tennis play Conan.
  3. Those minions are getting their own movie.

Every week I listen to Slate Magazine’s Political Gabfest. I always look forward to what the three hosts, David Plotz, John Dickerson, and Emily Bazelon, include at the end of the podcast for their topics of conversation at their weekly cocktail parties. Being a fan of both cocktail chatter and cocktail parties, I decided to riff on that theme and add my weekly top three stories that I think would be great conversation pieces at weekly cocktail parties.

  1. Andrew Sullivan still refuses to drive.
  2. Louis CK un-defends Daniel Tosh.
  3. Christopher Nolan and his fanboys.

Every week I listen to Slate Magazine’s Political Gabfest. I always look forward to what the three hosts, David Plotz, John Dickerson, and Emily Bazelon, include at the end of the podcast for their topics of conversation at their weekly cocktail parties. Being a fan of both cocktail chatter and cocktail parties, I decided to riff on that theme and add my weekly top three stories that I think would be great conversation pieces at weekly cocktail parties.

  1. Re-upping Spencer Ackerman’s diatribe against the Beltway.
  2. Where in the world is Jesse Jackson Jr.?
  3. The Sons of Anarchy season 5 trailer is here.

Every week I listen to Slate Magazine’s Political Gabfest. I always look forward to what the three hosts, David Plotz, John Dickerson, and Emily Bazelon, include at the end of the podcast for their topics of conversation at their weekly cocktail parties. Being a fan of both cocktail chatter and cocktail parties, I decided to riff on that theme and add my weekly top three stories that I think would be great conversation pieces at weekly cocktail parties.

  1. BJ Novak is leaving the The Office.
  2. New Blur songs coming next week.
  3. Why is Berlin rent so cheap? WWII.