A Quote by Edmund Phelps
Overpaying the banks for their toxic assets could contribute capital, but that may not be politically feasible or attractive.
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It's hard to tell which assets will be toxic. The best way to ensure that only shareholders and banks feel it is have adequate capital.
The financial crisis was linked to the fact that banks had excessive leverage and too many risky assets. The solution is not to try to dictate to banks what they can do or not do, but to require them to strengthen their capital to absorb potential losses and hold less risky assets.
We need the government to force the banks to write down all their bad assets now and then recapitalize themselves, preferably with private capital. Those banks that cannot raise sufficient capital should be seized and their deposits sold off.
If a lending institution is faced with bids for a package of toxic assets that are less than the carrying value of those assets, the sale of those assets would trigger a further loss and reduce the underlying capital of the institution.
What does reflect reality very well is complexity theory, which comes from physics. I'm the one pioneering the idea of bringing it to capital markets. When you look at capital markets through the lens of complexity theory, you ask "what's the scale of the system?" Scale is a fancy word for size. What measures are you using? If you look at total debt, the concentration of assets in the five largest banks, what percentage of the total assets of the five largest banks are interconnected? What you see is a very densely connected, fragile system that could collapse at any moment.
I passionately disagreed with Treasury Secretary Hank Paulson's plan to bail out the banks by using a public fund called the Troubled Asset Relief Program (TARP) to help banks take toxic assets off their balance sheets. I argued that it would be much better to put the money where the hole was and replenish the equity of the banks themselves.
Banks don't want certain asset classes, and that's created opportunities for private equity, hedge funds, Silicon Valley. In this case I think he was referring to some of the European banks shedding assets, and the big buyers are probably not going to be big American banks. Someone like Blackstone may have a very good chance to buy those assets, leverage them, borrow up a little bit, and do something good there.
Capital, however capital may be defined, would practically cease to exist as an income producing fund, for the simple reason that if money, wherewith to buy capital, could be obtained for one-half of one per cent, capital itself could command no higher price.
Whilst the developed world may say it wants to see much greater commitment to reduce greenhouse gas emissions, this may only be politically feasible if there is strong support for adaptation measures in those countries at greatest immediate risk.
I admit that one should never underestimate the capacity of banks to destroy enormous amounts of accumulated capital and reduce, temporarily, the supply. After all, capital is the accumulated savings of mankind. And banks are great masters in destroying enormous amounts of capital with great regularity.
On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [banks] to go into the investment banking business as continental European investment banks could always do, that it might give us a more stable source of long-term investment.
Separating out banks and investment banks right now under Glass-Steagall would have very big implications to the liquidity and the capital markets and banks being able to perform necessary lending.
We are in an unusual predicament as a global civilization. The maximum that is politically feasible, even the maximum that is politically imaginable right now, still falls short of the minimum that is scientifically and ecologically necessary.
Imperfect substitutability of assets implies that changes in the supplies of various assets available to private investors may affect the prices and yields of those assets.
I don't think you could have a banker serving in a major role in Washington in the next 10 years. I just don't think it's going to happen - it's just not politically feasible - so I don't spend much time thinking about it. Do I think I could do a good job? Maybe. It's possible.
Logically, it may be argued that banks could indeed lower interest rates and make up their profits through larger borrowing volumes. But banks, in turn, could justify exorbitant rates by arguing that they cater to a riskier segment.
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