Daily Archives: 25 November 2016

Systemic Importance and Institutions

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Minneapolis Federal Reserve President Neel Kashkari is on the right track, but he’s not there yet.  He’s one of a very small number of financial regulators (of any sort of regulator, come to that) who has the self-assurance and intellectual honesty to say, and to mean, things like

I start with the assumption that regulators are going to miss the next crisis.  We’re going to miss it.

He’s got a solution to that, too, but it’s only a partial solution, and that incompleteness stems from a fundamental lack of understanding.

The lesson he drew [from the Panic of 2008] is that if you want to reduce the risk that taxpayers will have to finance another rescue, financial giants need to be much better fortified before the next panic hits.

This is a start (we can argue with specific levels of fortification, of capital reserves, that are suitable, but the principle is sound), but he needs also to recognize the other side of this cash coin: businesses, including banks and systemically important institutions, need to be allowed to fail without taxpayer monies.  We have a perfectly fine bankruptcy system that works admirably well.

But the lack of understanding that regulators have of their capabilities, even with Kashkari’s degree of understanding as a start, makes much of that two-part solution less than fully relevant.  The lack of understanding is this: if the regulators can’t predict the next financial (or any other) crisis, if they can’t characterize what it will look like, on what basis do they presume to be able to predict the institutions that are/will be important to those crisis systems?

Foolishness

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This time regarding the Iran nuclear weapons deal, exemplified by this excerpt from a Wall Street Journal article concerning the Obama administration’s efforts to strengthen that deal during these last two months of overt lameduckness.

The picture they [Obama officials] plan to articulate for Mr Trump’s team is stark: if the agreement falls apart, and the US is blamed for its collapse, Iran would resume its nuclear program more aggressively. In that case, the US risks alienating Europe, as well as China and Russia, and limiting its ability to use sanctions again to contain Iran. Military action against Tehran’s nuclear facilities, these officials argue, could be the only alternative.

If the deal falls apart, Iran surely will accelerate its nuclear weapons development program.  But this is a program that Iran has never stopped, nor even held in abeyance, the deal notwithstanding.  Iran is aggressively pursuing development of missiles capable of delivering nuclear warheads against Israel and Europe, and Iran already has been caught—twice—with more heavy water than the deal permits.  Honest mistakes, that water.  Sure.

The US risks alienating Russia and the PRC?  They already are alienated from us, and have been for some time: see Georgia, Ukraine, Kaliningrad, the East China Sea, the South China Sea, the two nations’ cyber attacks against us, and on and on.

Limiting our ability to use sanctions again?  That was lost when the guy who sits in the Secretary of State’s chair, John “Motorboat Skipper” Kerry, with President Barack Obama’s (D) backing, browbeat France into accepting a much weaker deal than even the French wanted.  It was lost, too, when the Obama administration lifted so many of our sanctions and agreed to the lifting of UN sanctions.

Military action is the only alternative left?  To the extent that’s true (and it isn’t; alternatives remain, even if many of them have been made harder to use by this administration), it is so strictly as the outcome of the Obama administration’s foolishness.