Is Citigroup "too big to fail"?

[oggiesnr]

I think this was part of the rationale for the AT&T breakup in the '80s - too big to fail is too big to exist.

The problem is that a totally unregulated market is not interested in competition - they will M&A themselves into a monopoly, because that's the best return on shareowner investment.

As a consequence, the debate is about what kind of regulation must be applied to foster a balance between competition and economies of scale.

This seems to be the same hymn sheet that Mervyn King is reading from. He also wants "boring" banks to deal with retail banking so if their exotic and risk taking cousins go under it doesn't interfere with day to day banking as is happening now. In other words a return to the system that existed from the 1930's through to the 1980's (OK dates are open for debate but the sentiment is correct).

Steve

 

[Tippit]

No, the opposite: I'm talking about not cherry-picking. My point was that metal-currency regimes have been plagued with exactly the types of concerns you accuse fiat money of causing, which means you're probably wrong to say that replacing fiat money with other approaches will mitigate them.

I already explained why commodity money regimes can be unstable - fractional reserve banking.

It's unclear what you mean. The currency's value is measured against what it can buy - land, food, &c. Interest rates were related to the availability of lenders, and would be a proxy for cash shortages. The Byzantines complained chronically about bouts of hyperinflation / hyperdeflation and commodity price fluctuation, real estate price fluctuation, commodity shortages, and usurous interest rates during cash shortages. They also had occasional bouts of coinage speculation, as the state would issue new coins with lower mass as a way to generate more money in the economy despite there being no increase in metal. ie: the government legalized their own version of clipping and a version of inflation with metal currency - thus, Gresham's Law.

I don't know which history books you've been reading. The Byzantine empire had sound money and a healthy economy. That's sort of a prerequisite for a civilization lasting nearly 1000 years. It wasn't perfect, but that isn't the point.

Over and above this, there were other currency speculations, caused by contact with nations that used gold/silver in different ratios. Metal/metal exchange rates are arbitrary and as expected they didn't match up across borders, so arbitrage was possible during these periods. "Beware the money changers."

Riskless arbitrage isn't a problem in healthy markets.

I have no idea what that means: "the natural rate of gold inflation" - compared to the US dollar, you mean? How do you measure that going back 5,000 years? Why would there be a 'natural rate of gold inflation' at all?

It's quite simple, the rate of supply growth is ~3% per annum. There's a natural rate of gold inflation because people keep mining it out of the ground, and the technology to do so gets more and more cost-effective.

 

[blutoski]

I already explained why commodity money regimes can be unstable - fractional reserve banking.

Each approach has different reasons for being unstable. What I am trying to understand is why you believe that the recent spate of stability from fiat money is worse than the historical instability from other types, and why you would advocate abandoning it for systems proven more volatile and destructive.

It's also not clear what kind of system you propose to replace fractional reserve - are you saying that you actually want to use gold as currency? Or are you saying you want to establish a gold standard whereby dollars a nation can circulate are fixed to the number of ounces of gold in a vault? Or are you saying forget gold, just maintain global currencies to fixed ratios (pegging)?

I don't know which history books you've been reading. The Byzantine empire had sound money and a healthy economy. That's sort of a prerequisite for a civilization lasting nearly 1000 years. It wasn't perfect, but that isn't the point.

That's vague, and I'm not just focusing on the Eastern Empire. The other valuable point is that you can describe an economy as 'sound' and 'healthy' even though its citizens complained about it constantly. The key is not just to read the summaries, but to understand the day-to-day frustration of merchants and traders by reading their correspondence to one another. They all sound like you: this is a terrible system, we need to go back to the old ways that worked better, the government's management of the currency is to blame, &c &c.

Riskless arbitrage isn't a problem in healthy markets.

?

It's quite simple, the rate of supply growth is ~3% per annum. There's a natural rate of gold inflation because people keep mining it out of the ground, and the technology to do so gets more and more cost-effective.

I have no idea why you refer to that as a 'natural rate of inflation.' Even if the supply grew at 3%/yr, the rate of inflation would be based on its value in terms of other things it could buy. As the population grows and commercial transaction volume and velocity increases, demand for gold as currency would probably grow... or it might not, if other things become more valuable. The value of objects in reference to gold mass would fluctuate with relative need.

In the past, governments have controlled precious metal mines to manipulate the rate of inflation, including the Byzantines.

 

[drkitten]

I already explained why commodity money regimes can be unstable - fractional reserve banking.

And once again Tippit demonstrates that every complicated question has an answer that is both simple and wrong.

 

[drkitten]

Aren't these two paragraphs contradictory?

If there's not enough cash in circulation, doesn't that mean that much of the money in people's bank accounts is not really money that they "have", but money that they borrowed? So that when they spend it, they are in fact spending money that they don't have?

Not at all. Most of the money that circulates isn't in the form of cash.

I get paid via direct deposit, and spend it via my credit/debit card. At the end of the month, the card company takes the money out of my bank account via direct debit. If it weren't for the quarters I need to buy coffee in the department office, I could go weeks without touching cash.

For that matter, I control a substantial amount of federal research funding, again all through a P-card. I've spent something like a half million of the government's dollars over the past several years, and I've never seen a single picture of a dead president. It's all done via P-card and/or purchase order.

... but only because the electronic/credit system exists to support that. I don't need to take cash on a trip, because I can take my P-card and charge my business expenses to the National Science Foundation. From my perspective, this is actually much better. It's safer (if I'm robbed, I just cancel the card -- I'm not out the money), and I don't run the risk of running out of money if I have to change flights or something.

That actually happened to me in Japan a number of years back. JAL messed up my reservation, and I had to pull two grand out of thin air to get back to the States. I got it all back eventually, when we got the whole mess sorted out. Fortunately, I had a card on it that could take a sudden $2000 sucker punch without flinching.

Turn out your pockets. If, for whatever reason, you suddenly needed to spend $2000 to get home tonight, could you do it? I could. In fact, I suspect most of us could -- if we have a credit card with us. If I needed cash, I'd be hosed; I'm not sure I could come up with $10 for a cab ride.

 

[oggiesnr]

I already explained why commodity money regimes can be unstable - fractional reserve banking.

Not always true. For great periods of the 11th to 16th centuries, well before the advent of banks or FRB, there were periods of instability. Usually these were political in origin but the form of money didn't create the crisis (for example the ransom of Richard I or the civil unrests of the 12th and 13th centuries).

Now you can quibble and say that these are historical examples, true but they might well have their conterpart today (9/11 for example). The underlying value of any monetary system depends on confidence in that system. Once I do not believe that a gram of gold buys me a losf of bread then that system is as bust as any other.

Steve

 

[corplinx]

I would argue that the only aproach is the "don't allow this to happen" one. Once you accept that companies can become to big to fail your first objective is to prevent any company from doing so (by breaking them up into smaller bits say). If that proves imposible you throw in fairly heavy regulation and have a plan on file to nationalise them that gives the shareholders nothing.

This of course doesn't work so well with multinationals.

In the pre-global economy, perhaps it was easier.

A less drastic solution would be to set leverage limits for "too big to fail". It would limit smaller players to being single-security investment banks.

I am still dumbfounded at the audacity of some of these major players for over leveraging their businesses with mortgage backed securities.

The unintended consequence is that they could not overleverage with t-bills either in that case so I suspect there would be an exemption for tbills and muni bonds.



Much less extreme than "BREAK THEM UP FOR BEING SUCCESSFUL".

 

[geni]

In the pre-global economy, perhaps it was easier.

A less drastic solution would be to set leverage limits for "too big to fail". It would limit smaller players to being single-security investment banks.

I am still dumbfounded at the audacity of some of these major players for over leveraging their businesses with mortgage backed securities.

The unintended consequence is that they could not overleverage with t-bills either in that case so I suspect there would be an exemption for tbills and muni bonds.

Then they find another way of getting themselves in a complete mess. The problem with the lock them down under regulation aproach is that you risk essentialy forceing them into a slow death spirial as the small less regulated companies are able to out compete them. Alturnatively you discover that the idea that you can meaningfuly regulate large banks is large false.

Your other problem is that if you effectively say a bank is too big to fail you give it an unfair advantage in atracting savers.

Much less extreme than "BREAK THEM UP FOR BEING SUCCESSFUL".

Companies with large numbers of interests have been known to break themselves up to better focus on those interests. The advantage of the spilt them up aproach is that the various parts of the bank remain free to act but that you can accept any given part of it failing.

 

[Tippit]

Each approach has different reasons for being unstable. What I am trying to understand is why you believe that the recent spate of stability from fiat money is worse than the historical instability from other types, and why you would advocate abandoning it for systems proven more volatile and destructive.

It's also not clear what kind of system you propose to replace fractional reserve - are you saying that you actually want to use gold as currency? Or are you saying you want to establish a gold standard whereby dollars a nation can circulate are fixed to the number of ounces of gold in a vault? Or are you saying forget gold, just maintain global currencies to fixed ratios (pegging)?

I haven't gotten as far as a solution yet. I'm still trying to convince people that there is a big problem. As far as "historical instability", The Great Depression was the worst in world history, and it occurred just sixteen years after the Federal Reserve Act. The dollar has lost roughly 95% of it's purchasing power since the inception of the Fed. Someone (elite wealthy bankers) has profited greatly from the massive productivity gains that society has seen between now and then. It certainly wasn't currency holders. Therefore I reject your assertions about what is stable and what wasn't.

That's vague, and I'm not just focusing on the Eastern Empire. The other valuable point is that you can describe an economy as 'sound' and 'healthy' even though its citizens complained about it constantly. The key is not just to read the summaries, but to understand the day-to-day frustration of merchants and traders by reading their correspondence to one another. They all sound like you: this is a terrible system, we need to go back to the old ways that worked better, the government's management of the currency is to blame, &c &c.

Do you have examples of complaints about the civilization with the soundest money in history? What does this have to do with the fact that our current system is demonstrably terrible and inequitable?

I have no idea why you refer to that as a 'natural rate of inflation.' Even if the supply grew at 3%/yr, the rate of inflation would be based on its value in terms of other things it could buy. As the population grows and commercial transaction volume and velocity increases, demand for gold as currency would probably grow... or it might not, if other things become more valuable. The value of objects in reference to gold mass would fluctuate with relative need.

For the same reason that the Austrian school makes a distinction between monetary and price inflation. The Austrian definition of inflation is an increase in the money supply, in contrast to the common definition of a rise in the general price level.

In the past, governments have controlled precious metal mines to manipulate the rate of inflation, including the Byzantines.

Yes. Human nature (greed, in the form of the inflation tax) typically prevails, and empires crumble, your point being?

 

[Tippit]

Not always true. For great periods of the 11th to 16th centuries, well before the advent of banks or FRB, there were periods of instability. Usually these were political in origin but the form of money didn't create the crisis (for example the ransom of Richard I or the civil unrests of the 12th and 13th centuries).

I think you countered your own argument, by rightfully pointing out that the instability was political, rather than monetary.

Now you can quibble and say that these are historical examples, true but they might well have their conterpart today (9/11 for example). The underlying value of any monetary system depends on confidence in that system. Once I do not believe that a gram of gold buys me a losf of bread then that system is as bust as any other.

Steve

I wouldn't quibble that sound money will not prevent exogenous supply shocks, although it may help ameliorate them rather than exacerbate them.

 

[oggiesnr]

I think you countered your own argument, by rightfully pointing out that the instability was political, rather than monetary.

The two are linked in most cases. Politics is about power which usually comes down to money.

As an aside, would the banking crisis have played out differently if it had not occurred in the final months of a lame duck presidency, followed by a transition period?

Steve

 

[Tippit]

The two are linked in most cases. Politics is about power which usually comes down to money.

And yet, oddly enough, monopoly control of the money supply and the inflation tax doesn't seem to be an issue with you.

As an aside, would the banking crisis have played out differently if it had not occurred in the final months of a lame duck presidency, followed by a transition period?

Steve

No.

 

[lomiller]

The dollar has lost roughly 95% of it's purchasing power since the inception of the Fed.

Just how many IPods could I have bought with my yearly salary in 1935? How about plasma TV’s, cell phones, internet time or satellite dishes?

Even if you assume some form of equivalency between the things you could buy, how much of an average persons income went towards them. Food, for example makes up about 5% of my yearly income while in the 20’s and 30’s it could easily take up 50% of someone’s income.

How is all this possible if my money is worth less then money back then? More precisely, what is your explanation for it, since I already know why and know how important the federal reserve system is in making it happen.

 

[blutoski]

I haven't gotten as far as a solution yet. I'm still trying to convince people that there is a big problem. As far as "historical instability", The Great Depression was the worst in world history

Hard to compare a globalized economy to those prior, and hard to compare depressions for 'worseness' without agreeing on metrics. A good case in point is the implosion of the Spanish metal currency economy, which not only impacted Europe, but caused Spain to be one of the only countries to decline in population - about 12% dieoff rate over 50 years. So, fewer Americans died, but more were unemployed. Is that a "better" or "worse" depression?

, and it occurred just sixteen years after the Federal Reserve Act. The dollar has lost roughly 95% of it's purchasing power since the inception of the Fed. Someone (elite wealthy bankers) has profited greatly from the massive productivity gains that society has seen between now and then. It certainly wasn't currency holders. Therefore I reject your assertions about what is stable and what wasn't.



Do you have examples of complaints about the civilization with the soundest money in history? What does this have to do with the fact that our current system is demonstrably terrible and inequitable?



For the same reason that the Austrian school makes a distinction between monetary and price inflation. The Austrian definition of inflation is an increase in the money supply, in contrast to the common definition of a rise in the general price level.

So, here's a question: which one do you think actually matters to a person?

eg: if the money supply increases, but I can still buy more with my dollar... am I negatively or positively impacted?

Yes. Human nature (greed, in the form of the inflation tax) typically prevails, and empires crumble, your point being?

Ah. I had misunderstood. I thought you were leading to some sort of alternative that you thought would be better. My understanding now is that you're just saying the current system is imperfect, which everybody in the thread has also said many times over. We're agreeing violently.

Relevant proverb: "Best is the worst enemy of better."

 

[oggiesnr]

And yet, oddly enough, monopoly control of the money supply and the inflation tax doesn't seem to be an issue with you.

Whoever prints the money (or controls the gold mines) is going to screw me. At least this way I know who's doing the screwing and may have some say in it via the ballot box.

Steve

 

[Tippit]

Just how many IPods could I have bought with my yearly salary in 1935? How about plasma TV’s, cell phones, internet time or satellite dishes?

None, and that's totally irrelevant. Technological progress and economic growth occur in spite of the monetary system we have, not because of it. On the other hand, your 2009 salary could have bought a lot more of the things you need in 1935.

Even if you assume some form of equivalency between the things you could buy, how much of an average persons income went towards them. Food, for example makes up about 5% of my yearly income while in the 20’s and 30’s it could easily take up 50% of someone’s income.

I don't know, but it should also be obvious that people weren't in debt up to their eyeballs in 1935. Much of their labor didn't go to servicing massive debt, and they owned their homes and cars.

How is all this possible if my money is worth less then money back then? More precisely, what is your explanation for it, since I already know why and know how important the federal reserve system is in making it happen.

Your money is undoubtedly worth less than it was then, this isn't disputed. The fact that you can buy things now that you couldn't before is a function of technological progress, and occurs, as i said before, in spite of the Federal Reserve System. Despite it's persistent inflation, prices in computers fall sharply over time because there are more powerful deflationary forces at work. The Federal Reserve is not the source of the great wealth of the United States. They don't produce anything except claims on other people's wealth. All the Fed does is create money out of nothing and tax currency holders, creditors, and debtors, all in different ways, and in a most regressive way.

Far from our economic savior, it is a blight, and it is directly responsible for the mess we're in now.

 

[Tippit]

Hard to compare a globalized economy to those prior, and hard to compare depressions for 'worseness' without agreeing on metrics. A good case in point is the implosion of the Spanish metal currency economy, which not only impacted Europe, but caused Spain to be one of the only countries to decline in population - about 12% dieoff rate over 50 years. So, fewer Americans died, but more were unemployed. Is that a "better" or "worse" depression?

It's commonly accepted that the Great Depression was the worst economic depression in world history, by any number of metrics. If you want to quibble with this, pick a metric and provide evidence for some other historical period. In any case, you can't deny that the Fed presided over it (of course, they didn't merely preside over it, they caused it - see my sig).

So, here's a question: which one do you think actually matters to a person?

eg: if the money supply increases, but I can still buy more with my dollar... am I negatively or positively impacted?

Negatively. Whenever the money supply increases, you're paying an inflation tax to whomever spent your purchasing power. Even if economic growth outstrips the creation of money, you're still losing relative purchasing power. Even if you can buy more with your dollar, you're still buying less than you could have. Of course, since we typically always have positive rates of inflation, this is a pipe dream.

Ah. I had misunderstood. I thought you were leading to some sort of alternative that you thought would be better. My understanding now is that you're just saying the current system is imperfect, which everybody in the thread has also said many times over. We're agreeing violently.

Relevant proverb: "Best is the worst enemy of better."

Let me make myself clear. The current system isn't imperfect, it's utterly corrupt, unjust, and unsustainable. The world would be far better off with sound money and sound banking. Wealth condensation would be limited, and society would be more equitable.

 

[Tippit]

Whoever prints the money (or controls the gold mines) is going to screw me. At least this way I know who's doing the screwing and may have some say in it via the ballot box.

Steve

You're missing the point. Even if they control the gold mines, they still can't magically increase the rate of gold production beyond physically imposed limits. They can horde gold and exploit the inherent instability of the fractional reserve system to cause deflations (see William Jennings Bryant's Cross of Gold speech), but they can't inflate it perpetually because it's physically impossible (unlike fiat money).

 

[drkitten]

None, and that's totally irrelevant. Technological progress and economic growth occur in spite of the monetary system we have, not because of it. On the other hand, your 2009 salary could have bought a lot more of the things you need in 1935.

This is simply untrue.

Pick almost any single necessity -- food, shelter, clothing, transportation, medical care, entertainment, work tools -- and you'll find that when measured as hours-of-labor-at-prevailing-wage, it almost certainly costs less today than it did in 1935. The exceptions are generally things where you can't buy the 1935-equivalent any more because they have been so overtaken by technology that no one is interested in owning a horse-drawn plow.

Even in housing, where there has been a substantial increase, that's because 1935-era housing conditions were so bad by modern standards that they're often not legal any more. (The 2006 International Residential Code, for example, specifies that habitable rooms must have at least 70 square feet -- many municipalities are even more generous.)

So while it's true that I pay twenty times as much in nominal dollars for a nickel candy bar, I also make twenty-five times as much an hour.

As an example, a cheap new car cost $625 in 1935, when the average wages were about $1600/year. Today, average wages are about 25 times that ($40,000), and a cheap new car costs about $15k, or 24x what it cost in 1935 -- and it's a substantially better car.

 

[drkitten]

Let me make myself clear. The current system isn't imperfect, it's utterly corrupt, unjust, and unsustainable.

Let me make myself clear. Your proposals are even worse.

The current system is at least based on accurate data and is influenced by the real world.