Things I Wish I Said
The monopoly on financial force
This kind of scale severely hampers the ability of the Federal Reserve to make moves it thinks are important. Or, to use a more common phrase, these institutions are "too big to fail." It is commonly argued (not least by President Obama) that Sweden's approach to its banking crisis was much easier because the banks were much smaller. The current (crisis-inflated) balance sheet at Sweden's central bank (Riksbank) is some 200 billion kroner. The Nordbanken (Sweden's BofA), was taken over in the Swedish banking crisis at $8.67 billion dollars, or about 70 billion kroner.
The balance sheet isn't the only piece of the equation -- presumably the Fed can throw its weight around significantly more effectively than can a bank, so it has more leverage in terms of what it can accomplish than does a bank. Still, though, it is clear that unless this leverage is much higher than seems likely (like 100:1 or something), the scale of the financial industry is much larger than that of the central bank, with large individual financial instutitions being as big or bigger. Still, it is worth noting that in Sweden, having the banks being a bit smaller than the central bank seems to have made the degrees of freedom quite a bit more accomodating. The ability of the financial sector to staff the offices of its regulators and effectively lobby Congress is another manifestation of its large scale relative to the government institutions meant to regulate it.
Is this really a good thing?
The premise of modern governments (the 'Westphalian state') has been the monopoly of force. That is, the state is responsible for (and is in control of) all use of force within its borders. Indeed, the definition of a 'failed state' is the inability of the central government to control the existence of armed militia groups operating within its borders.
This isn't to say that large banks are just like armed revolutionaries or something like that, but a pretty good rule of thumb that a country shouldn't have financial operators at or above the scale of the central bank. This keeps the play at a level where quick, prudent action is possible when necessary, and enables the government to move all-at-once in ways that these gigantic balance sheets of financial sector actors makes impossible. ¶ 9:54 PM 0 Comments
Monday, July 27, 2009
What's the balance of economic power between a country's government and its banks? Take the Unites States, for instance. The Federal Reserve, in response to the 2008 financial crisis, has increased its balance sheet (the quantity of assets it holds) from a bit under $1 trillion[good graph] to over $2 trillion. That's a lot of money. What's the balance sheet of Bank of America, the country's largest bank? $1.8 trillion. How about Goldman Sachs? $884 billion.
This kind of scale severely hampers the ability of the Federal Reserve to make moves it thinks are important. Or, to use a more common phrase, these institutions are "too big to fail." It is commonly argued (not least by President Obama) that Sweden's approach to its banking crisis was much easier because the banks were much smaller. The current (crisis-inflated) balance sheet at Sweden's central bank (Riksbank) is some 200 billion kroner. The Nordbanken (Sweden's BofA), was taken over in the Swedish banking crisis at $8.67 billion dollars, or about 70 billion kroner.
The balance sheet isn't the only piece of the equation -- presumably the Fed can throw its weight around significantly more effectively than can a bank, so it has more leverage in terms of what it can accomplish than does a bank. Still, though, it is clear that unless this leverage is much higher than seems likely (like 100:1 or something), the scale of the financial industry is much larger than that of the central bank, with large individual financial instutitions being as big or bigger. Still, it is worth noting that in Sweden, having the banks being a bit smaller than the central bank seems to have made the degrees of freedom quite a bit more accomodating. The ability of the financial sector to staff the offices of its regulators and effectively lobby Congress is another manifestation of its large scale relative to the government institutions meant to regulate it.
Is this really a good thing?
The premise of modern governments (the 'Westphalian state') has been the monopoly of force. That is, the state is responsible for (and is in control of) all use of force within its borders. Indeed, the definition of a 'failed state' is the inability of the central government to control the existence of armed militia groups operating within its borders.
This isn't to say that large banks are just like armed revolutionaries or something like that, but a pretty good rule of thumb that a country shouldn't have financial operators at or above the scale of the central bank. This keeps the play at a level where quick, prudent action is possible when necessary, and enables the government to move all-at-once in ways that these gigantic balance sheets of financial sector actors makes impossible. ¶ 9:54 PM 0 Comments
