Current too-big-to-fail policies are giving banks the wrong incentive: namely, to grow – and fast. A bank’s risk to the taxpayer rises exponentially with the size of the bank, so a bank with $500bn in assets is more than 25 per cent riskier than a bank with $400bn in assets. But the Treasury seems to consider TBTF a binary thing: you are or you aren’t, and if you are then your capital ratios should be capped. This is a mistake. First, TBTF is not a binary thing. Second, capping capital ratios gives banks an incentive to keep their ratios steady while growing their assets as quickly as possible so that they can palm off risk on the taxpayer.
We are misjudging risks elsewhere, too. Gillian Tett points out that clearing houses can collapse, too. It is only investors’ faith in the risklessness of exchanges that maintains their liquidity. Perhaps it is just a lack of imagination, she says: but just because it hasn’t happened yet, doesn’t mean it can’t.
Fannie Mae is implementing a “Deed for Lease” scheme, under which near-foreclosure borrowers may be eligible to lease their homes. The government-sponsored enterprise lost $19 billion in Q3 and has requested a further $15bn bail-out.
Sri Lanka has bought gold, following India’s 200 tonne purchase. “We did experience this huge currency volatility during the time of the crisis that gave us the feeling that we need to save in something more solid,” the Sri Lankan central banker said. He described the amount, estimated at five tonnes, as “fairly substantial”, and said Sri Lanka had “not stopped accumulating it”.
Yesterday, the UK government announced £25bn in additional quantitative easing funds. “The more money they create, the more the Bank of England’s policy makers must wish they had better things to spend it on than government debt,” says Stephanie Flanders. £173bn out of £175bn of QE funds to date have been spent on gilts, even though “up to £50bn” was initially earmarked for corporate bonds. Meanwhile, no-one wants to buy Japanese bonds, concerning investors because the bonds were issued to help finance a tax shortfall, and poor demand means institutions will have to pick up the slack. That could result in an additional Y6,000bn of Japanese sovereign bond issuance in the current financial year.
As economists await US employment figures, Obama is due this morning to sign in an extension of unemployment benefits and the housing tax credit this morning. Rather different policies are being followed elsewhere: Japan, Spain and the Czech Republic have introduced pay-to-go schemes for migrants. Under the schemes, unemployed legal migrants will be issued with stipends that cover the cost of a one-way plane ticket “home”, and in some cases an additional lump-sum payment.
The debate over the future of the dollar should acknowledge the bigger role the US has played in providing several “global goods”, such as being the consumer and lender of last resort. The future provision of these goods – if not from the US – should not be separated from the discussions about the decline of the dollar. But will the dollar decline much further? One analyst points out that the dollar could rise steeply if Roubini’s argument about the mother-of-all-carry trades is correct, and/or when dollar-denominated IOUs get called in. The Economist counters growing consensus around Roubini’s predictions.
And, if we want to make the world a fairer place, we must maintain investment in sub-Saharan Africa, increase social mobility and structure carbon reduction demands so that poorer countries can tackle abject poverty first.