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.


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.

Two of my favourite journalists comment on Peter Beinart’s new and controversial book, “The Crisis of Zionism”.

Spencer Ackerman:

So as not to dodge the fundamental issue myself: I think Peter is wrong to argue for a boycott of products from the settlements, but on the grounds of unfeasibility; his heart is in the right place. I suggest it might be better to shift U.S. defense aid into platforms like the Iron Dome anti-rocket system. That’s the kind of weapons program that, in addition to being awesome, counters Israel’s legitimate security vulnerabilities and creates a strategic fact: it removes a security-based argument for Israel retaining its hold on the West Bank. Then the United States ought to pressure, cajole and coax Israel to unilaterally withdraw from the West Bank. Withdraw unilaterally; allow the creation of a fact called the State of Palestine; and then begin the agonizing process of negotiating with the Government of Palestine over final borders, dividing Jerusalem, water rights, spectrum rights, and so forth. The world should create a fund to assist the resettling of Palestinian refugees in land controlled by the State of Palestine — that is, not within the State of Israel. The position of the United States ought to be that Jewish settlers who wish to remain in places like Ariel after final-status discussions over borders between Israel and Palestine conclude are welcome to be citizens of the State of Palestine. (Although that’s probably unfeasible, because there would be Arab assaults on the settlements; Jewish reprisal attacks; and Israel would inevitably be sucked into a war that would look like kind of Balkan. But if Israel wants to avoid the difficulties of ordering the IDF to vacate the settlements during a withdrawal, I am sure NATO would jump at the chance to do it for them.)

Matt Yglesias:

The establishment forces in the American Jewish community have decided that anyone who wants to subject Israeli policy to harsh criticism on ethical grounds is per se hostile to Israel, Israelis, Zionism, and perhaps the Jewish people writ large. To me that seems like a daft strategic approach. But I guess I’ve lost interest in fighting for control of Brand Zionism. It’s clear to me that the actually existing Israeli polity is fully committed to political and military domination of the entire land between the Jordan and the Sea and doesn’t really care what I or anyone else thinks about that. The American Jewish establishment has covered up the crass immorality of this agenda with the kind of two-wrongs-make-a-right ethical “reasoning” that they counsel you against in kindergarten, whereby somehow if Hamas is bad then immoral Israeli conduct is transmogrified into acceptable behavior.


Yglesias posted a really great reassessment of economist Simon Kuznet’s apocryphal statement about the four types of world economies.

Money quote:

China is so large and was formerly so poor that its advance from poverty-stricken to low-middle-income has really fueled the worldwide growth picture. At the same time, its per capita GDP is still only half of Argentina’s and whatever you might say about Argentine political dysfunction and lack of strong property rights it’s not a dictatorship run by the Communist Party with little pictures of Mao Zedong on its money. It’s actually extremely understandable that people would like to avoid the kind of “exproportion risk” involved in keeping all your eggs in that particular basket. Yet at the same time if you could somehow ignore these risks, China seems like the place where the good investment opportunities are. The combination of the two can tie the worldwide flow of capital into knots.

Mark Calabria over at Cato wrote on 15 March that affordable housing prices and conditions are being taken to their breaking point, and misses a key point.


 If liberals truly cared about the poor and needy, they’d deregulate their local housing market and actually allow for the provision of affordable housing.

If memory serves, isnt this the exact topic Matt Yglesias discusses in his new book, “The Rent is Too Damn High” ? Except that Yglesias is for deregulation in housing and basically makes Calabria’s points moot.

Nice try though.


Echoing Matt Yglesias, I too read the transcript of St. Louis Fed chairman Bullard’s speech on housing and monetary policy.

Bullard, per the St. Louis Fed:

Bullard noted that labor market policies (e.g., unemployment insurance, worker retraining) have direct effects on the unemployed.  In contrast, he said, “monetary policy is a blunt instrument which affects the decision-making of everyone in the economy.”  In particular, low interest rates hurt savers, he stated.  “It may be better to focus on labor market policies to address unemployment instead of monetary policy.”

For the past five years I spent as a front line financial representative I can assure you that the aging population of this nation see falling interest rates on their savings, and thus affecting their dividends in the worst possible light. For example, I tried explaining to an elderly person why it was important on a macro level at least for the government to keep rates low, at least in theory. This customer harked me back to the ‘good ol’ days’ of the 1980’s, when Savings and Loan Associations were crashing, and interest rates were as high as a mushroom cloud.

I think it is a fundamental problem with the mass of the electorate, or at least the mainline of investors from the electorate, that they are willfully ignorant of the changes in economic and monetary policy that has evolved since the 1980s. And when I tried in vain to explain this, the answer I got more often than not was that I was ‘too young to understand’.

Savings are low because there is an obvious deficit in consumer investment in both the market and real estate, respectively. The answer to sustained economic stagnation is not to put all your money into a MMA and hope to wait the crisis out (at least for longer that a year). It is to be involved in the process and realizing that the returns on your investment in safe depository accounts will likely yield less than other investments (like your home improvements which cause a production trend).


In summary, all those people wishing that they could watch their modest fortune roll over and over to make more money are deluded at this juncture. Without a great deal of market effort, the return on any investment will likely just eek more and more towards zero.

Per the St Louis Fed:


I am less interested in the jobless rate from the last two years as much as the spike that occurred right after 9/11 in 2001. Presumably, the terror attack had a big effect on the economy as a short term shock, but the sustained stagnation for the period of 2002-2003 is interesting because I dont remember people becoming nervous even though the jobless rate spiked up to a rate that hadnt been seen since 1995.

Last year Matt Yglesias, a hero of this blog, talked with Tyler Cowen of Marginal Revolution. The topic: the slowing progress of technology/society.

Worth a watch regardless of your political views.

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