Tuesday, June 21, 2011

Don't Mind the Man Behind the Curtain

It may be painful to read banking or economics posts but less so if you look for the man (or woman) behind the curtain, along the lines of the Wizard of Oz. This post is a good example of the fascinating type. At first glance it looks to be about something really yawn-inducing. At second glance you see How It Is Done.

A snippet:
Capital matters. Let me put that another way. The current fight over additional capital requirements for the banking industry, eye-glazing though it is, also happens to be the most important reform moment since the financial crisis broke out three years ago. More important than the wrangling over Dodd-Frank. More important than the ongoing effort to regulate derivatives. More important even than the jousting over the new Consumer Financial Protection Bureau.
If investment banks like Merrill Lynch had had adequate capital requirements, they would not have been able to pile on so much disastrous debt. If A.I.G. had been required to put up enough capital against its credit default swaps, it’s quite likely that the government would not have had to take over the company. If the big banks had not been able to so easily game their capital requirements, they might not have needed taxpayer bailouts. A real capital cushion would have allowed the banks to absorb the losses instead of the taxpayers. That’s the role capital serves.
Adequate capital hides a plethora of sins. And because, by definition, it forces banks to use less debt, it can also prevent sins from being committed in the first place. “There is no credible way to get rid of bailouts except with capital,” says Anat Admati, a finance professor at Stanford Business School and a leading voice for higher capital requirements. “The only cure is capital,” says Daniel Alpert, a founding managing partner of Westwood Capital. A few days ago, The Wall Street Journal wrote an editorial applauding the recent suggestion by Daniel Tarullo, a Federal Reserve governor, that the biggest banks hold as much as 14 percent of assets in capital. I couldn’t agree more.
Which is why a hearing held last week by the House Financial Services Committee was such a sorry sight. Under the guise of examining whether the new financial regulations — including proposed capital requirements — were making American banks less competitive, the Republican majority peppered U.S. regulators, including Tarullo, with skeptical questions about the need for increased capital requirements. It was pathetic.
As pathetic as the end-of-season bargain price sale on women's work at the Supreme Court yesterday? You decide.

And how about this article form a few days' ago?
Arguing that the U.S. food supply is 99 percent safe, House Republicans cut millions of dollars Thursday from the Food and Drug Administration’s budget, denying the agency money to implement landmark food safety laws approved by the last Congress.
Saying the cuts were needed to lower the national deficit, the House also reduced funding to the Agriculture Department’s food safety inspection service, which oversees meat, poultry and some egg products. And lawmakers chopped $832 million from an emergency feeding program for poor mothers, infants and children. Hunger groups said that change would deny emergency nutrition to about 325,000 mothers and children.
The reference to the emergency feeding program for poor mothers, infants and children is to the WIC program. It's astonishingly effective. Even those who try to kill it allow that. But it's helping women and actually born children so it is not allowed.