WEBVTT

NOTE How Free Should Banking Be? An International Comparison

1
00:00:00.000 --> 00:00:08.260
Thank you very much for inviting me to participate in your brown bag seminar series, it's a pleasure

2
00:00:08.260 --> 00:00:15.240
to be here. Jeff told me that this is a relatively informal group, it seems to be quite formal

3
00:00:15.240 --> 00:00:23.620
for one sitting around this table, therefore I prepared some informal comments about banking

4
00:00:23.620 --> 00:00:28.920
in the U.S. and some other countries and Jeff suggested that my purpose ought to be to try

5
00:00:28.920 --> 00:00:37.920
I want to try to stimulate you to think about banking, the way in which we ought to regulate banks in the context of an overall financial system.

6
00:00:37.920 --> 00:00:48.920
That's my assigned task, is to just talk about banking in general terms and then perhaps some of you to ask some questions, make some comments,

7
00:00:48.920 --> 00:00:53.920
so that perhaps I can learn more about banking, how it has been regulated in different countries,

8
00:00:53.920 --> 00:00:55.920
The Theory of Money and Credit

9
00:01:23.920 --> 00:01:29.520
in the United States, and in particular, I've looked at some of the bank regulatory systems

10
00:01:29.520 --> 00:01:38.960
in some of the EU, well, all the EU countries and the G10 countries, and if you take the

11
00:01:38.960 --> 00:01:44.800
non-overlapping countries, you come up with 19 separate and distinct countries, and so

12
00:01:44.800 --> 00:01:49.280
I've done some work with some people in trying to identify some of the characteristics of

13
00:01:49.280 --> 00:01:52.280
and the regulatory regimes in the different countries.

14
00:01:52.280 --> 00:02:02.280
So, in fact, if you look at the current issue of Businessweek, there's a piece talking about banking reform is back on the back burner.

15
00:02:02.280 --> 00:02:12.280
And as you know, there has been some interest in perhaps in reforming the financial system even further here in the United States in recent years.

16
00:02:12.280 --> 00:02:19.380
In fact, sometime soon, the Clinton administration will put forth its proposals for modernizing

17
00:02:19.380 --> 00:02:21.760
the financial system.

18
00:02:21.760 --> 00:02:27.200
It's probably not my choice of words, modernizing the financial system, but nonetheless, that's

19
00:02:27.200 --> 00:02:31.480
what the Clinton administration is talking about, is putting some proposals that would

20
00:02:31.480 --> 00:02:35.680
perhaps try to induce the Congress to make still further changes in the U.S. financial

21
00:02:35.680 --> 00:02:37.120
system.

22
00:02:37.120 --> 00:02:42.040
There is a report that has been prepared on behalf of the Clinton administration.

23
00:02:42.040 --> 00:02:45.040
In fact, I know the author of the report. He's a good friend of mine.

24
00:02:45.040 --> 00:02:49.540
I had been asked actually to help write the report.

25
00:02:49.540 --> 00:02:53.040
I declined for various reasons.

26
00:02:53.040 --> 00:02:57.540
And the report has been read by Secretary Reuben.

27
00:02:57.540 --> 00:03:03.040
He's worked, gone through, talked, spent many hours talking about the report,

28
00:03:03.040 --> 00:03:05.040
with the author of the report.

29
00:03:05.040 --> 00:03:08.040
Then, of course, you have an editor, a journalist, a very good journalist,

30
00:03:08.040 --> 00:03:29.720
and so on and so forth, and as well as to engage the likely reaction is going to be

31
00:03:29.720 --> 00:03:35.240
from all the affected parties, that would include the banks, insurance companies, securities firms,

32
00:03:35.240 --> 00:03:40.680
so on and so forth, as well as to engage the likely reaction to the report from members of Congress.

33
00:03:40.680 --> 00:03:46.760
And right now, the reaction from the Congress is not all that favorable to what I would call

34
00:03:46.760 --> 00:03:53.000
more sweeping regulatory change. Therefore, the Clinton administration is considering perhaps

35
00:03:53.000 --> 00:03:58.200
revising the report or pulling back from some of its initial proposals. That's not unusual.

36
00:03:58.200 --> 00:04:05.640
It's an interaction of politics and economics or finance, a combination of the three.

37
00:04:05.640 --> 00:04:10.400
So it's not yet clear what's going to happen in the report, what it's going to say and

38
00:04:10.400 --> 00:04:12.440
what the administration is going to do.

39
00:04:12.440 --> 00:04:18.320
An area of contention has to do with whether or not banks should be permitted to own stock

40
00:04:18.320 --> 00:04:20.840
in non-financial firms.

41
00:04:20.840 --> 00:04:22.160
That's a major issue.

42
00:04:22.160 --> 00:04:26.560
And indeed, it turns out that the Federal Reserve, Alan Greenblatt, has recently tested

43
00:04:26.560 --> 00:04:32.800
before a subcommittee, a house banking committee, opposing bank ownership of non-financial firms.

44
00:04:32.800 --> 00:04:37.800
And indeed, Chairman Leach, the chairman of the Full House Committee, testified before

45
00:04:37.800 --> 00:04:42.900
the subcommittee, which is not more than unusual, it's not all that common either.

46
00:04:42.900 --> 00:04:49.880
It turns out that he presented a lot of information about why it would be a bad idea, basically

47
00:04:49.880 --> 00:04:54.560
because he argues that there'd be not just potential conflicts of interest, but you'd

48
00:04:54.560 --> 00:05:03.560
have conglomerates, mega firms that would tend to dominate a particular segment of the

49
00:05:03.560 --> 00:05:10.960
U.S. society and potentially lead to oligopolistic, monopolistic type practices somehow in some

50
00:05:10.960 --> 00:05:18.760
way if non-bank, non-bank ownership and non-financial firms would be bad in other words for U.S.

51
00:05:18.760 --> 00:05:30.760
It's interesting that the people prepared all the tables, a company's report, where people work at the Federal Reserve system.

52
00:05:30.760 --> 00:05:39.760
So, Chairman Leach is very close to the Federal Reserve and it's not surprising that they share similar views about bank ownership and non-financial firms.

53
00:05:39.760 --> 00:05:45.760
Also, there's the issue of non-financial ownership of banks, which has been effectively restricted in this country.

54
00:05:45.760 --> 00:05:50.880
So, you know, it's an issue of talking about these things. I did bring, and then of course

55
00:05:50.880 --> 00:05:55.200
there's an issue, John Wells sent me an email just before I came here. We hear a lot about

56
00:05:55.200 --> 00:06:00.000
privatization of banking in different countries, former Soviet Union countries, I believe they were

57
00:06:00.000 --> 00:06:08.080
15 or 16, as well as, here's a piece John sent me about the Romanian Senate approved bank

58
00:06:08.080 --> 00:06:12.800
privatization bill. So, you know, we have state banks in this country. Some people say what we

59
00:06:12.800 --> 00:06:18.640
What we ought to do in other countries is get the state out of state banks because in

60
00:06:18.640 --> 00:06:24.040
other countries they do have such a, there are indeed many government-owned banks or

61
00:06:24.040 --> 00:06:28.480
state-owned banks in the countries and those banks have performed somewhat poorly.

62
00:06:28.480 --> 00:06:32.160
You can look at one of the biggest banks in France, you can look at some of the banks

63
00:06:32.160 --> 00:06:36.680
in some other countries in issue of who should own the banks, should it be the state or the

64
00:06:36.680 --> 00:06:37.680
private sector.

65
00:06:37.680 --> 00:06:48.080
I brought a handout to sort of perhaps get us talking about these issues.

66
00:06:48.080 --> 00:06:59.680
I didn't bring all that many, but I figured that if necessary, two people could look at the same handout.

67
00:06:59.680 --> 00:07:14.680
And this is going to be very simple for some of you, and some of you clearly have studied many of these issues in the work that you do.

68
00:07:14.680 --> 00:07:22.680
I should admit to not being all that familiar with some of what's done by Austrian economists.

69
00:07:22.680 --> 00:07:27.680
I'm not intimately familiar with some of the writings of Austrian economists.

70
00:07:27.680 --> 00:07:41.680
I have looked at a couple of papers as a result of the recent Lew and Jeff and I said to invite me to attend some of the sessions of the conference in which people from different countries participated.

71
00:07:41.680 --> 00:07:45.680
So I did look at one or two papers.

72
00:07:45.680 --> 00:07:50.680
And there's an issue about fractional banking, a paper on fractional banking.

73
00:07:50.680 --> 00:07:59.680
and I'm sorry, I was looking through the paper and apparently von Mises has advocated or had advocated what is to my way of thinking as a neural bank.

74
00:07:59.680 --> 00:08:05.680
I don't know if that's correct. Maybe some of you know, Luland probably knows a lot about some of these things.

75
00:08:05.680 --> 00:08:14.680
But in any event, I have not read some of the works by some of the social, I guess, with the Austrian School.

76
00:08:14.680 --> 00:08:21.560
but maybe that's a perspective that you can enlighten about.

77
00:08:21.560 --> 00:08:26.000
It turns out that they look at this first figure and this is by way of trying to get

78
00:08:26.000 --> 00:08:29.800
you to think about some of the issues.

79
00:08:29.800 --> 00:08:34.200
Designing a financial system, I don't say who should design the system, probably not

80
00:08:34.200 --> 00:08:40.320
me, but we do have financial systems, different types of financial systems in different countries.

81
00:08:40.320 --> 00:08:44.200
So this is by way of getting you to think about the issues.

82
00:08:44.200 --> 00:08:51.560
You have obviously, and we teach this in economics courses, finance courses too, we have savers,

83
00:08:51.560 --> 00:08:56.400
people who save, and you go back to, most of us still teach, or some of us do at least,

84
00:08:56.400 --> 00:09:02.080
about Irving Fisher's sort of approach to the motivation for saving, and it's really

85
00:09:02.080 --> 00:09:04.080
postponed consumption.

86
00:09:04.080 --> 00:09:09.840
So we have these two-period diagrams that we typically use to talk about how people

87
00:09:09.840 --> 00:09:16.740
People can be happy by saving today or borrowing today as well as saving things like that.

88
00:09:16.740 --> 00:09:20.480
We have then a capital asset pricing model that we talk a lot about today and think about

89
00:09:20.480 --> 00:09:24.440
how people, if they do save, allocate their savings among different types of financial

90
00:09:24.440 --> 00:09:25.800
assets.

91
00:09:25.800 --> 00:09:30.360
These sorts of models are questioned by various people, the underlying assumptions in that

92
00:09:30.360 --> 00:09:34.840
and as to whether or not they really do adequately explain the real world and that's essentially

93
00:09:34.840 --> 00:09:40.640
So essentially what I'm trying to do is expose you to some, what I call, as I used to say

94
00:09:40.640 --> 00:09:46.840
with respect to these growth theory models that were quite prominent, is one observed

95
00:09:46.840 --> 00:09:51.920
in the real world, so-called stylized facts, and then one developed a model to explain

96
00:09:51.920 --> 00:09:52.920
those facts.

97
00:09:52.920 --> 00:09:57.360
It was a matter of trying to make some observations, say, how do we explain what it is we do observe

98
00:09:57.360 --> 00:09:58.600
in the real world?

99
00:09:58.600 --> 00:10:03.600
And that's effectively what I'm in the process of doing now, that is collecting some information,

100
00:10:03.600 --> 00:10:12.600
And hopefully facts. And then trying to see if we can explain why it is that we observe what we do, not just in the US but in other countries.

101
00:10:12.600 --> 00:10:17.600
So here basically we have savers and lenders and we have borrowers and investors.

102
00:10:17.600 --> 00:10:25.600
And basically the funds can flow from savers to borrowers in different ways or combinational ways.

103
00:10:25.600 --> 00:10:30.600
For example, you see down in the bottom there's a box that says financial firms.

104
00:10:30.600 --> 00:10:45.600
We think of banks, insurance companies, pension funds, a wide range of financial services from the United States, and funds can flow through them, and then in turn, the funds flow on to borrowers, basically.

105
00:10:45.600 --> 00:10:58.600
And we sometimes say that these are the intermediaries, banks can intermediate between savers and borrowers, and the question is, they then provide credit, and they do some things that the savers themselves don't have to do,

106
00:10:58.600 --> 00:11:28.600
The Theory of Money and Credit The Theory of Money and Credit

107
00:11:28.600 --> 00:11:33.160
Adverse selection problems, trend is to sort of intervene between good and bad borrowers.

108
00:11:33.160 --> 00:11:37.120
We talked about the more hazards sort of problems.

109
00:11:37.120 --> 00:11:44.800
The fact that what happens is once you lend money to a firm or an individual, you have

110
00:11:44.800 --> 00:11:48.880
to sort of monitor an individual, be sure that the individual or firm uses the funds

111
00:11:48.880 --> 00:11:51.960
in the way in which you intended.

112
00:11:51.960 --> 00:11:56.600
That can be done by individuals with pre-clients done by these other types of financial service

113
00:12:26.600 --> 00:12:35.600
in Encounters, in financial systems, most financial systems, and then perhaps ways in which these types of problems are overcome or resolved.

114
00:12:35.600 --> 00:12:45.600
And then you'll have to ask, are there failures in some place? We call them, at least I'm used to thinking in terms of market theories, the required government intervention.

115
00:12:45.600 --> 00:12:53.600
And are there costs of government intervention? Do they exceed the benefits or vice versa?

116
00:12:53.600 --> 00:13:02.600
So that's how I sort of start looking at the system and think of returns and risk associated with this entire system.

117
00:13:02.600 --> 00:13:04.600
So you can ask yourself, what do the systems look like?

118
00:13:04.600 --> 00:13:12.600
And this could be a country would have this type of diagram, or you can think of the whole world is being embodied in this type of diagram.

119
00:13:12.600 --> 00:13:22.600
That is, you can go from savers to bars in different countries and through different types of institutions or firms or capital markets.

120
00:13:22.600 --> 00:13:25.600
Okay, let me sort of move on so I don't take too much time.

121
00:13:25.600 --> 00:13:34.600
Then I just gave you a schematic, which I don't want to say too much about, but you're all familiar with this diagram.

122
00:13:34.600 --> 00:13:39.600
It just shows you the way in which the U.S., at least by my way of thinking, has been regulated.

123
00:13:39.600 --> 00:13:47.600
The banking institutions have evolved over time in the U.S. from, say, 1781 to the present time.

124
00:13:47.600 --> 00:13:55.600
and time. And progressively what we've done is we've increased the regulation of the government involvement in the banking system.

125
00:13:55.600 --> 00:14:12.600
The government's getting heavily involved in different ways over time so that we've become effectively a country in which banks are perhaps more heavily regulated here than in many other parts of the world and certainly more heavily regulated today than they were many years ago.

126
00:14:12.600 --> 00:14:19.600
And that's why some people are suggesting that we ought to deregulate our banks, more so than we did, say, in the early 1980s.

127
00:14:19.600 --> 00:14:24.600
I won't go through this, but you all familiar with how we got deposit insurance.

128
00:14:24.600 --> 00:14:33.600
And there's a lot of what I call interesting work being done in which people are going back and revisiting the 1800s, revisiting what's happening in other countries

129
00:14:33.600 --> 00:14:41.600
and sort of telling different sorts of stories today than were told some years ago in many of the traditional banking texts.

130
00:14:41.600 --> 00:15:11.600
That is that perhaps the last evil which separated investment banking and commercial banking really was premised, was based on an incorrect premise that really it wasn't, there wasn't really a conflict of interest between both commercial banking and investment banking being done within the same financial firm that we can attribute to the stock market crash and all the bank failures of the 1930s to a mixing of commercial banking and investment banking.

131
00:15:11.600 --> 00:15:12.600
Banking.

132
00:15:12.600 --> 00:15:16.860
That wasn't the case and there's some good evidence to support that point of view by

133
00:15:16.860 --> 00:15:23.680
some economists, natural economists, whatever we call ourselves or they call themselves.

134
00:15:23.680 --> 00:15:28.520
And progressively though, we really have in a major way, I think, intervened in the marketplace.

135
00:15:28.520 --> 00:15:33.440
We even got the SEC, which requires a release or public disclosure of certain information.

136
00:15:33.440 --> 00:15:36.080
You have to say, would that have happened?

137
00:15:36.080 --> 00:15:41.080
Did firms have an incentive to release information on their own, disclose information to establish

138
00:15:41.080 --> 00:15:47.320
to Reputation, which had value to them over time, or not, did we need the SEC requirement?

139
00:15:47.320 --> 00:15:50.680
And then of course now you can sue, and firms do, and I've been involved in some of those

140
00:15:50.680 --> 00:15:56.600
cases in which there are class action suits brought against firms arguing that they didn't

141
00:15:56.600 --> 00:16:02.880
disclose material facts, which usually those suits are brought after their losses sustained

142
00:16:02.880 --> 00:16:07.120
by investors, claiming they didn't know certain things, certain things weren't disclosed and

143
00:16:07.120 --> 00:16:12.120
that were material to their decision-making processes.

144
00:16:12.240 --> 00:16:14.800
In any event, this just shows over a period of time

145
00:16:14.800 --> 00:16:17.000
we've moved increasingly into regulating,

146
00:16:17.000 --> 00:16:18.160
I won't go through all this,

147
00:16:18.160 --> 00:16:20.900
but if you read, I think, contemporary documents

148
00:16:20.900 --> 00:16:21.960
or even past documents,

149
00:16:21.960 --> 00:16:23.760
a lot of people go through the debate,

150
00:16:23.760 --> 00:16:26.560
was wild-wide banking good or bad?

151
00:16:26.560 --> 00:16:29.360
Were there runs on institutions that were destructive

152
00:16:29.360 --> 00:16:31.160
to the payments and in the correctional system?

153
00:16:31.160 --> 00:16:32.000
How many runs?

154
00:16:32.000 --> 00:16:33.060
How severe were they?

155
00:16:33.060 --> 00:16:40.100
where then people now say that a lot of the so-called systemic, widespread banks have been overstated

156
00:16:40.100 --> 00:16:41.660
that the problems were as bad as they say.

157
00:16:41.660 --> 00:16:45.300
Private note issue, perhaps didn't have the sort of problems.

158
00:16:45.300 --> 00:16:50.820
National bank notes when they came into existence really didn't provide for a uniform currency.

159
00:16:50.820 --> 00:16:55.460
There were different exchange rates in different parts of the country, even for national bank notes,

160
00:16:55.460 --> 00:16:58.700
all those sorts of things.

161
00:16:58.700 --> 00:17:05.460
In any event, the U.S. Constitution sort of provides the rationale for the government,

162
00:17:05.460 --> 00:17:09.620
the congressional involvement in our banking system.

163
00:17:09.620 --> 00:17:14.500
It authorizes them to delegate authority, such as establishing a central bank, the Federal

164
00:17:14.500 --> 00:17:15.500
Reserve.

165
00:17:15.500 --> 00:17:20.020
It comes from the authority given to the Congress to get involved in banking.

166
00:17:20.020 --> 00:17:25.980
And that phrase there, it's not a period after thereof, but that phrase is sort of the rationale

167
00:17:25.980 --> 00:17:26.980
for government involvement.

168
00:17:26.980 --> 00:17:46.980
in the US, and it has a long history, as we all know, because it only goes way back to what has happened in other countries and goes back to medieval days and beyond, in which it's useful to be able to create legal tender to fund armies and bureaucracies, all those sorts of things.

169
00:17:46.980 --> 00:18:02.480
But in any event, you can look at a time series that has looked at the U.S. and talked a lot about the rationale or lack of rationale for government involvement in the banking system and financial markets in general.

170
00:18:02.480 --> 00:18:09.480
And incidentally, when you look, banks, for example, weren't permitted to branch, as we all know, throughout most of the United States.

171
00:18:09.480 --> 00:18:13.560
It's even with the recent legislation, the Regal Neal legislation, it turns out there

172
00:18:13.560 --> 00:18:17.480
are heavy constraints on the ability still to branch nationwide.

173
00:18:17.480 --> 00:18:23.120
There's a cap on the percentage of deposits that one can control in a single stake, and

174
00:18:23.120 --> 00:18:30.400
there's a nationwide cap on the percentage of deposits or assets that a single bank can

175
00:18:30.400 --> 00:18:33.040
control in the U.S.

176
00:18:33.040 --> 00:18:36.960
So it's not as if we've gone to nationwide banking and branching.

177
00:18:36.960 --> 00:18:39.960
The states have been permitted to opt out certain portions of the legislation.

178
00:18:39.960 --> 00:18:48.960
Let me tell you that some information I put together, and I was visiting the OCC in a document about the most useful part of the papers,

179
00:18:48.960 --> 00:18:58.960
the words maybe that we use to describe the tables, but the tables themselves, some of the information is nowhere else available, as far as I know, in any single place except this document.

180
00:18:58.960 --> 00:19:05.120
and why is that? Because we got, I was able to visit some countries, European countries and

181
00:19:05.120 --> 00:19:09.640
and talk to the bank registrars and sent us a questionnaire to them and they provided information

182
00:19:09.640 --> 00:19:15.240
which they wouldn't otherwise provide had I just been an academic. So they were quite cooperative

183
00:19:15.240 --> 00:19:20.440
and some of the information is quite useful and you're free if you wish you have any interest you

184
00:19:20.440 --> 00:19:25.960
can have a copy, I'd be happy to make one available to you. But the banks, Trent and Branch, so I made

185
00:19:25.960 --> 00:19:41.960
I'm not going to go into that sort of history, but you can think about why they couldn't branch, what were some of the issues. Banks couldn't own real estate, for example, even national banks, since the late 1800s. They were prohibited from buying stock in other firms.

186
00:19:41.960 --> 00:19:56.960
So that's where it limited their size and some people say that stimulated the growth in our capital markets and why it is that banks, for example, didn't grow and become much larger in this country than they actually did.

187
00:19:56.960 --> 00:20:09.960
So maybe it's why we have these boxes and I'll come back to this in a second, the financial firms are so much more banks in particular compared to the capital market and I'll give you some indices of what I mean by that in a minute or so.

188
00:20:09.960 --> 00:20:15.080
So, even in bank insurance companies, to turn of the century until they can't own stock

189
00:20:15.080 --> 00:20:16.080
firms any longer.

190
00:20:16.080 --> 00:20:19.400
So, if you look at portfolio insurance companies, you might say, why do they hold a lot of bonds

191
00:20:19.400 --> 00:20:21.320
and not much common stock?

192
00:20:21.320 --> 00:20:26.200
Well, what I'm suggesting is, don't look to market forces, don't look to competition

193
00:20:26.200 --> 00:20:30.440
necessarily in answering what we are trying to explain, what we observe.

194
00:20:30.440 --> 00:20:33.880
Frequently, you can turn to laws and regulations, and that's what I'm suggesting.

195
00:20:33.880 --> 00:20:38.600
It's not always market forces that explain what we observe in the real world, though

196
00:20:38.600 --> 00:20:43.520
So they can overcome regulatory impediments to competition and those sorts of things,

197
00:20:43.520 --> 00:20:48.360
the pursuit of profits, but frequently laws and regulations explain what we observe.

198
00:20:48.360 --> 00:20:54.400
And the key is to sort of ask, are those appropriate laws and regulations somehow defining what

199
00:20:54.400 --> 00:20:56.960
one means by appropriate?

200
00:20:56.960 --> 00:21:00.320
One way might be market efficiency criterion.

201
00:21:00.320 --> 00:21:07.200
In any event, so it's very interesting if you go through and look at the development

202
00:21:07.200 --> 00:21:13.200
I think it's phenomenally interesting. Some of you have spent more time than I have, so I take note.

203
00:21:13.200 --> 00:21:20.200
There's nothing original in laying out the laws and regulations in those sorts of things, but it's an attempt to try to tell you.

204
00:21:20.200 --> 00:21:24.200
A lot of people try to look at this history for the U.S. and explain it.

205
00:21:24.200 --> 00:21:33.200
Why do we observe all these laws and regulations? We have public choice people, we have political economy people, and a mix of others.

206
00:22:03.200 --> 00:22:09.940
as large as they have in some other countries, heavily restricted what they could do, insurance

207
00:22:09.940 --> 00:22:10.940
companies too.

208
00:22:10.940 --> 00:22:17.980
So, if you go to the next table, it's one just showing some comparisons in terms of

209
00:22:17.980 --> 00:22:23.660
world population, world GDP, world banking assets, so on and so forth.

210
00:22:23.660 --> 00:22:28.480
Lew has informed me that there are about 200 countries in the world, and I sort of agree

211
00:22:28.480 --> 00:22:58.480
with his figure. And if that's so, we've looked at 19 countries, EU and G10 countries, and you can see when you go down a total, you can't see it obvious, but if you go down, you find out that when you look at these countries, and the reason I wanted to look at them is that although these countries account for about 14% of the world's population, they account for about 77% of the world's GDP, 86% of world banking assets, and 96% of mutual funds.

212
00:22:58.480 --> 00:23:03.480
and assets, and 82% of the equity market capitalization.

213
00:23:03.480 --> 00:23:11.480
In other words, you can explain a lot of what's happening in banking and the design of financial systems looking at these countries.

214
00:23:11.480 --> 00:23:16.480
Because then what's happening now is you have the World Bank and the IMF trooping all around the world,

215
00:23:16.480 --> 00:23:23.480
trying to some degree to impose a particular financial system on a lot of emerging market countries.

216
00:23:23.480 --> 00:23:34.480
The question is, are they suggesting, if not requiring, a certain type of financial system that makes no sense to almost anybody who thinks about financial systems?

217
00:23:34.480 --> 00:23:44.480
Is it one that would be determined by market force, or is it one that somehow furthers the empire building of the World Bank or the IMF?

218
00:23:44.480 --> 00:23:52.400
Or are they looking for work, having now found themselves playing a diminishing role in providing

219
00:23:52.400 --> 00:23:56.400
credit because there's a lot more private credit flowing into some countries and looking

220
00:23:56.400 --> 00:23:57.400
for other things to do.

221
00:23:57.400 --> 00:24:04.040
And I don't say that with some seriousness, which is to say that they are indeed talking

222
00:24:04.040 --> 00:24:05.960
increasingly about global banking standards.

223
00:24:05.960 --> 00:24:10.440
I was at a conference in New York the end of last week and on the panel with me was

224
00:24:10.440 --> 00:24:34.680
The IMF has hired, within the past four years, approximately 125 to 150 financial economists.

225
00:24:34.680 --> 00:24:42.340
And the IMF reports that there are probably two-thirds of the 181 member countries, IMF,

226
00:24:42.340 --> 00:24:46.280
that have experienced banking problems, if not crises.

227
00:24:46.280 --> 00:24:50.000
So you try to look and say, well, when they go into these countries, and the World Bank

228
00:24:50.000 --> 00:24:54.560
does too, and they hire academic types to go into these countries, what sort of systems

229
00:24:54.560 --> 00:24:56.560
are they designing, and telling them to design?

230
00:24:56.560 --> 00:25:02.440
Are they stressing capital markets, are they stressing banking systems, deposit insurance,

231
00:25:02.440 --> 00:25:05.720
or are they relying more on market forces?

232
00:25:05.720 --> 00:25:10.880
Now, you might say, what type of system should they advocate or are they advocating, is an

233
00:25:10.880 --> 00:25:11.880
appropriate one?

234
00:25:11.880 --> 00:25:19.320
Well, when you look at these tables, what I'll sort of suggest to you is that, for example,

235
00:25:19.320 --> 00:25:21.440
what people now do is they categorize countries.

236
00:25:21.440 --> 00:25:24.440
We've all heard about the German universal banking system.

237
00:25:24.440 --> 00:25:29.080
We've heard about the Japanese financial system, which is under a great deal of stress today,

238
00:25:29.080 --> 00:25:31.840
a lot of non-performing loans at some of the big banks.

239
00:25:31.840 --> 00:25:37.440
The biggest bank in the world is Japanese, now price seven of the top ten are Japanese.

240
00:25:37.440 --> 00:25:41.920
We now have our biggest bank, Pales in comparison to the biggest bank in the world, measured

241
00:25:41.920 --> 00:25:42.920
by assets.

242
00:25:42.920 --> 00:25:47.520
We could do it other ways and our banks fare much better in terms of say market capitalization.

243
00:25:47.520 --> 00:25:52.560
But when you look at the data here, you find that we have what are called, some people

244
00:25:52.560 --> 00:25:58.160
describe as bank-based systems, financial systems, and some people then talk about what's

245
00:25:58.160 --> 00:26:06.760
a market-based financial system or an equity-based financial system and I won't go into the details.

246
00:26:06.760 --> 00:26:14.440
And let me give you an order of magnitude, you can't see it from this table and the market-based

247
00:26:14.440 --> 00:26:18.480
or equity-based systems for example, two countries would be the U.S. and U.K.

248
00:26:18.480 --> 00:26:24.840
Now why do we call the U.S. and U.K. equity market or capital market-based systems?

249
00:26:24.840 --> 00:26:40.840
Well, if you take the equity capitalization as a percentage of GDP, it's 110% in the UK and in the US it's 80%, that is, equity market capital is divided by GDP, it's 80% in the US, 110% in the UK.

250
00:26:40.840 --> 00:26:53.840
Now let's go to Germany and France as two other examples. When you do the same calculation, you calculate equity market capitalization and GDP in Germany, you can't see it from this table.

251
00:26:53.840 --> 00:27:00.940
It's 24% in France, it's 35%. So people say, gee, Japan for its financial system relies

252
00:27:00.940 --> 00:27:08.220
much more heavily on banks than in the United States. In the US, we rely much more heavily

253
00:27:08.220 --> 00:27:13.860
on capital markets than the banks or other financial services. So if you looked at that

254
00:27:13.860 --> 00:27:19.120
first diagram connecting savers and borrowers, savers go mainly through what? Banks in Germany

255
00:27:19.120 --> 00:27:25.640
Money, and in the U.S. they go mainly through the capital markets to the borrowers.

256
00:27:25.640 --> 00:27:29.200
Two different type systems, so the boxes, if you, were weighted differently, even though

257
00:27:29.200 --> 00:27:33.080
there are players in both at the top side and the bottom side, or the north and south

258
00:27:33.080 --> 00:27:34.840
of that figure.

259
00:27:34.840 --> 00:27:37.560
So it's just a weight, and why is it weighted that way?

260
00:27:37.560 --> 00:27:39.160
Is it market forces?

261
00:27:39.160 --> 00:27:44.280
And then you have to ask yourself, which I do, would the IMF advocate the German type

262
00:27:44.280 --> 00:27:46.600
system in a lot of emerging markets?

263
00:27:46.600 --> 00:27:49.360
Is that a more desirable system?

264
00:27:49.360 --> 00:27:54.420
So we have to ask ourselves, it seems to me, what do you mean by desirable?

265
00:27:54.420 --> 00:27:56.120
Why does that system exist?

266
00:27:56.120 --> 00:28:02.080
Is it a result of competitive or market forces or is it a result of laws and regulations?

267
00:28:02.080 --> 00:28:06.160
And it has something to do with corporate governance, which is frequently a term that,

268
00:28:06.160 --> 00:28:12.480
while it's associated a lot of work of financial economists, okay, I say that because I don't

269
00:28:12.480 --> 00:28:22.480
I don't always know. Sometimes people have PhDs in economics and they do finance. Sometimes people have PhDs in finance and they do economics, so it's a blend of the two.

270
00:28:22.480 --> 00:28:28.480
But that has to do with what's the way in which you induce firms to operate very efficiently.

271
00:28:28.480 --> 00:28:34.480
We have what's referred to as a fragmented ownership system in the United States.

272
00:28:34.480 --> 00:28:39.480
That is, there are very few individual large percentages of shares in companies.

273
00:28:39.480 --> 00:28:45.120
and a lot of the stock goes by very many parties and we call it a fragmented system, which

274
00:28:45.120 --> 00:28:49.840
means there's a separation sometimes between the owners and then the managers of the companies

275
00:28:49.840 --> 00:28:54.040
and we say they tend to be professionals and we say that creates agency problems, which

276
00:28:54.040 --> 00:28:57.800
is to say maybe the managers don't always act in the best interest of the stock or operate

277
00:28:57.800 --> 00:29:00.120
the firm as efficiently as they should.

278
00:29:00.120 --> 00:29:02.840
Well, there's ways in which that's corrected.

279
00:29:02.840 --> 00:29:04.720
One way is a hostile takeover.

280
00:29:04.720 --> 00:29:10.500
So you have market forces at work, even in a capital market-based system, that tries

281
00:29:10.500 --> 00:29:14.520
to induce firms to operate more efficiently, and we could go into Michael Melton's junk

282
00:29:14.520 --> 00:29:16.960
bonds, and we'll direct to Bernard Lambert and those things.

283
00:29:16.960 --> 00:29:22.000
But that's a way in which market systems can work, it's also a way in which you can spend

284
00:29:22.000 --> 00:29:25.000
some time in bars.

285
00:29:25.000 --> 00:29:31.800
It turns out that when you go to the German system on the other hand, it's mainly the

286
00:29:31.800 --> 00:29:32.800
banks.

287
00:30:02.800 --> 00:30:04.800
The Theory of Money and Credit

288
00:30:32.800 --> 00:31:02.800
are two different systems. In large part, it's laws and regulations. Our banks are told they can't own stock in companies. Up to five percent. But it has to be totally passed. You can't vote it. No controlling interest. And under some cases, you can go even higher than that. But almost without exception, that's not the case. Our banks don't really exert any control over firms with respect to their ownership of

289
00:31:02.800 --> 00:31:08.040
of Stocks. If there's any control, it's exerted through the loans that they make. So banks

290
00:31:08.040 --> 00:31:13.760
therefore go to the capital markets much more so because they can't go to the banks and

291
00:31:13.760 --> 00:31:18.560
let the banks grow. Don't forget the size because of, in large part, branching restrictions.

292
00:31:18.560 --> 00:31:22.800
They can't go to the bank and service the bank more fully, especially as a result of

293
00:31:22.800 --> 00:31:28.920
Glass-Steagall. So you say, is that now desirable? Should we let banks service firms more fully

294
00:31:28.920 --> 00:31:31.720
by Offering Securities Activities,

295
00:31:31.720 --> 00:31:34.720
not to say get involved in insurance and real estate.

296
00:31:34.720 --> 00:31:38.720
Well, that's a debate, and most, I believe, economists today

297
00:31:38.720 --> 00:31:41.640
would argue it's time to do away with Glass-Steagall.

298
00:31:41.640 --> 00:31:44.760
The Federal Reserve has been doing that since 87.

299
00:31:44.760 --> 00:31:48.600
It gave permission to some banks to set up subsidiaries

300
00:31:48.600 --> 00:31:50.800
within a holding company framework

301
00:31:50.800 --> 00:31:53.920
so that they could indeed engage to a greater degree

302
00:31:53.920 --> 00:31:55.480
in securities activities.

303
00:31:55.480 --> 00:31:57.960
And the Fed says, well, you can set up a subsidiary,

304
00:31:57.960 --> 00:32:19.920
The Office of the Control of the Currency has reinterpreted the laws under which national

305
00:32:19.920 --> 00:32:25.240
banks operated to permit the establishment of operating subsidiaries directly of national

306
00:32:25.240 --> 00:32:30.440
National Banks, and that opens the door for them to set up subsidies directly, bypassing

307
00:32:30.440 --> 00:32:31.760
the holding company framework.

308
00:32:31.760 --> 00:32:38.400
The Federal Reserve argues that the OCC, then once OCC did that, the Fed said, okay, 25%

309
00:32:38.400 --> 00:32:43.240
for fear that probably some banks, national banks, would decide to just open up an operating

310
00:32:43.240 --> 00:32:45.680
subsidiary of the OCC.

311
00:32:45.680 --> 00:32:50.480
The OCC has gotten two applications to set up operating subsidiaries, both the nation's

312
00:32:50.480 --> 00:32:53.600
bank, and now the Congress is very concerned.

313
00:32:53.600 --> 00:32:58.560
And it's probably about overture. Do you want the Federal Reserve to regulate banks and

314
00:32:58.560 --> 00:33:04.460
have bigger staffs, or do you want the OCC to regulate some banking activities than OCC?

315
00:33:04.460 --> 00:33:10.400
And then what do you do about the state banks that can't necessarily operate in subsidiaries?

316
00:33:10.400 --> 00:33:15.720
So the Congress is forced to do something just because of the preemptive strike taken

317
00:33:15.720 --> 00:33:22.280
by OCC. Mr. Ludwig, who has to recuse himself from a couple of these applications for operating

318
00:33:22.280 --> 00:33:37.840
It turns out though it is interesting times. Now let's go to the next table and in carrying

319
00:33:37.840 --> 00:33:44.840
on with what I just said, basically I tried to group the countries, me and my two co-authors

320
00:33:44.840 --> 00:34:02.960
The U.S. is the most restrictive country in the world with respect to regulating its banks,

321
00:34:02.960 --> 00:34:06.040
in every respect, when you include branching restrictions.

322
00:34:06.040 --> 00:34:10.880
Now you might say, is that, again, you can say is it good or bad, and we can debate what

323
00:34:10.880 --> 00:34:14.160
one means by good or bad and those sorts of things, but is this desirable?

324
00:34:14.160 --> 00:34:18.080
Should we do this? Should we? Are we? And we're out of step with the rest of the industrialized

325
00:34:18.080 --> 00:34:22.640
countries of the world. So you have to say, as an economist, if somebody asks you, well,

326
00:34:22.640 --> 00:34:27.640
you think we should change? Should we move more in their direction? Should we deregulate?

327
00:34:27.640 --> 00:34:32.600
What are the pros and cons? One thing that's interesting is that despite all our restrictions

328
00:34:32.600 --> 00:34:38.440
and the heavy government involvement and all the thousands of regulators, we've had problems.

329
00:34:38.440 --> 00:34:43.960
From 80 to 95, more than 5,000 federally insured depository institutions failed. And by that,

330
00:34:43.960 --> 00:34:49.360
I mean, they were taken over by the government, dismembered, liquidated, or sold to other

331
00:34:49.360 --> 00:34:58.560
financial firms, and it cost approximately $200 billion, $200 billion to resolve.

332
00:34:58.560 --> 00:35:04.160
The biggest probably financial disaster to strike the U.S. since the Great Depression.

333
00:35:04.160 --> 00:35:10.200
And indeed, the savings loans, which account for the bulk of those costs, which were shared

334
00:35:10.200 --> 00:35:11.200
by Taxpayers

335
00:35:11.200 --> 00:35:15.440
which is why it's probably considered the most egregious disaster.

336
00:35:15.440 --> 00:35:19.200
The savings vote fared much better in the Great Depression than they did in the 1980s,

337
00:35:19.200 --> 00:35:20.440
if you can believe it.

338
00:35:20.440 --> 00:35:25.960
The losses borne by uninsured deposits were smaller than the losses borne by the federal

339
00:35:25.960 --> 00:35:28.560
insurer in the 1980s.

340
00:35:28.560 --> 00:35:32.040
Interesting fact.

341
00:35:32.040 --> 00:35:37.840
It also turns out, so with all the restriction, and we really didn't get a lot of big bang

342
00:35:37.840 --> 00:35:40.440
for Buck, when you look at the crises in other countries.

343
00:35:40.440 --> 00:35:42.160
Furthermore, when you look at other countries,

344
00:35:42.160 --> 00:35:43.940
they had nothing.

345
00:35:43.940 --> 00:35:45.240
I'll make a blanket statement,

346
00:35:45.240 --> 00:35:48.120
it's up to you to disprove me with facts, okay?

347
00:35:48.120 --> 00:35:50.840
A blanket theory that when you look at all these

348
00:35:50.840 --> 00:35:52.880
other countries, the two-thirds IMF,

349
00:35:52.880 --> 00:35:55.640
you don't find that the problems with failed institutions,

350
00:35:55.640 --> 00:35:58.000
they're either associated with state-owned banks,

351
00:35:58.000 --> 00:36:00.120
or they're associated with the classic problems

352
00:36:00.120 --> 00:36:02.160
which are fraud or real estate problems,

353
00:36:02.160 --> 00:36:03.360
commercial real estate problems.

354
00:36:03.360 --> 00:36:05.240
It wasn't the securities activities,

355
00:36:05.240 --> 00:36:06.800
it wasn't insurance activities,

356
00:36:06.800 --> 00:36:16.800
It wasn't the non-commercial real estate activities, and it wasn't the commercial non-bank ownership

357
00:36:16.800 --> 00:36:22.680
of banks, that is, non-commercial firm ownership of banks, or the bank's ownership of non-commercial

358
00:36:22.680 --> 00:36:23.680
receipts.

359
00:36:23.680 --> 00:36:28.520
That didn't have anything to do with these sorts of problems, but the concern nonetheless

360
00:36:28.520 --> 00:36:35.560
on the part of our Congress is indeed that it would be concentration of power if we move

361
00:36:35.560 --> 00:36:41.080
too much like other countries. Conflicts of interest is usually used. With that means

362
00:36:41.080 --> 00:36:46.840
if a firm has a securities subsidiary, what happens is as you come to me as a customer,

363
00:36:46.840 --> 00:36:50.640
for example, I give you a securities advice, I say, oh, well, why do you want to underwrite?

364
00:36:50.640 --> 00:36:55.920
Why would you want to go out and raise capital, raise funds in the capital market? It's my

365
00:36:55.920 --> 00:37:00.280
bank. We'll make you a loan. So what you do is there's a conflict there. You could help

366
00:37:00.280 --> 00:37:04.440
the firm by underwriting the securities issuance or what you could do is make a loan. We say

367
00:37:04.440 --> 00:37:10.440
Bankers say that's a potential conflict. Well, banks, the whole world is a series of conflicts.

368
00:37:10.440 --> 00:37:16.440
The ordinary transactions, most of what they do involves potential conflicts.

369
00:37:16.440 --> 00:37:22.440
And that's why the regulators, presumably if they do anything, is to keep those conflicts in check.

370
00:37:22.440 --> 00:37:28.440
Concentration of power is always an issue. How do you determine whether there's excessive concentration of power?

371
00:37:28.440 --> 00:37:32.440
What's your market? Is it domestic, international?

372
00:37:32.440 --> 00:37:39.440
Well, Citibank operates in 98 countries of the world. It's more countries than any other bank in the world.

373
00:37:39.440 --> 00:37:47.440
The second largest bank is the England Chartered Bank, but it operates on a Hong Kong, and it operates in 80-some countries.

374
00:37:47.440 --> 00:37:53.440
So our banks are increasing globally. Exxon gets over 80% of its assets and its revenues come from outside the United States.

375
00:37:53.440 --> 00:38:00.440
Coca-Cola has had a press conference saying, we're not a U.S. firm. We have a headquarters. Our headquarters is in the U.S.

376
00:38:00.440 --> 00:38:07.440
80% of the revenues come from outside the United States, over half the revenues is City Corp, half Chase, half JP Morgan.

377
00:38:07.440 --> 00:38:11.440
You go on down the list. Are these US firms? What are they? How do we want to regulate them?

378
00:38:11.440 --> 00:38:16.440
Banks can do more in other countries than they can in this country if they're chartered here.

379
00:38:16.440 --> 00:38:22.440
So again, what do you want our banks to be? How would you change this table if you did?

380
00:38:22.440 --> 00:38:29.440
Also, some people say because of deposit insurance, you don't want deposit insurance subsidies or discount window subsidies

381
00:38:59.440 --> 00:39:15.440
St. Louis, basically said, well, there's a subsidy there, and he was asked why not eliminate it, he said, well, it's politically infeasible, therefore we need restrictions on powers, is an issue.

382
00:39:15.440 --> 00:39:26.440
Then the second, the next to last table, so I don't, I'll give you a chance to make your comments, is ownership form, you might say doesn't really matter.

383
00:39:26.440 --> 00:39:36.440
Well, the point is, why should the government, you have to ask yourself, tell banks you have to use a holding company to engage in certain activities?

384
00:39:36.440 --> 00:39:49.440
You can't choose your own corporate organizational form. It seems almost the height of absurdity to sort of say, we not only tell you what you can do with respect to the products and services you can offer, where you can offer them,

385
00:40:19.440 --> 00:40:27.440
and not, apparently, the preferred organizational form for firms given the choice in different countries across the board here.

386
00:40:27.440 --> 00:40:34.440
This information, incidentally, it's not unlikely, part of this exercise, you would have thought this information to be readily available.

387
00:40:34.440 --> 00:40:40.440
The Congress is debating issues, the regulatory authorities, without knowing what's happening in other countries.

388
00:40:40.440 --> 00:40:43.440
So, occasionally, people just elude while there are problems in Germany.

389
00:40:43.440 --> 00:40:53.440
Some of you were telling me the other day, congressional staffer, I said, well, tell me what those are, and wow, they're very complicated, but we still have to do something, and I said, well, wouldn't you like a few facts?

390
00:40:53.440 --> 00:41:06.440
So the fact of the matter is, is you would think the Federal Reserve or the OCC, some of the agencies, they just say, this is the situation in Germany, but everybody talks across purposes, so part of the exercise is you people are smart,

391
00:41:06.440 --> 00:41:14.440
You see, I'm not giving any text. You look at these tables. You conclude what you think is the way in which maybe the U.S. ought to go, if you are.

392
00:41:14.440 --> 00:41:22.440
It's actually me. I'm looking at the same table as you. And I can tell my story. But what I think is just occasionally, we all have the same facts.

393
00:41:22.440 --> 00:41:31.440
We say, this is the situation in these different countries. Now, I conclude, no, the U.S. should be restricted. And then I say, why?

394
00:41:31.440 --> 00:41:36.920
Why? Because all these other countries are... I asked Larry Meyer. I said, Larry Meyer,

395
00:41:36.920 --> 00:41:43.000
he heard some of what I talked about, and I've known him for years and that. And so

396
00:41:43.000 --> 00:41:48.640
I said, ask him. Of course, I said, like, look, based upon some information presented

397
00:41:48.640 --> 00:41:55.120
earlier by me, basically, when you look at these other countries, US is on a step. Would

398
00:41:55.120 --> 00:42:00.920
you conclude that maybe these other countries are all wrong? That is, they have a bad financial

399
00:42:00.920 --> 00:42:07.080
system, we should try to suggest to all these 180 other countries, you know, taking out

400
00:42:07.080 --> 00:42:12.880
the 19 here, that they should adopt a U.S. type system, or, and not adopt, say, the German

401
00:42:12.880 --> 00:42:15.320
system or one of these other systems.

402
00:42:15.320 --> 00:42:22.320
And he said, well, Jim, you know, Jim Barton, some good work, very informative work, unfortunately,

403
00:42:22.320 --> 00:42:27.760
we have to look beyond just these near-datas and what's going on in other countries.

404
00:42:27.760 --> 00:42:34.000
We have to think fairly broadly about these, what I call Greenspan-esque or speak or whatever

405
00:42:34.000 --> 00:42:35.000
we describe.

406
00:42:35.000 --> 00:42:41.760
Meaning, you're saying very good, very complicated, these are complex issues, we live in a world

407
00:42:41.760 --> 00:42:47.400
in which you have to balance political factors and economic factors and basically we have

408
00:42:47.400 --> 00:42:53.800
a very good system that has lasted and served us well for more than 200 years or something

409
00:43:23.800 --> 00:43:28.200
Well, I think the German system regulates in the Japanese, it regulates the

410
00:43:28.200 --> 00:43:33.480
capital markets, excessively. They tax things, you can't own shares and stocks

411
00:43:33.480 --> 00:43:38.560
without paying a heavy tax or issue them. So I'm not yet a thorough expert on all

412
00:43:38.560 --> 00:43:42.680
the different laws and regulations or tax systems, but you find that the

413
00:43:42.680 --> 00:43:47.440
Germans don't have the system they have solely because of the workings of the

414
00:43:47.440 --> 00:43:50.960
market forces in a competitive environment. And a lot of times the government

415
00:43:50.960 --> 00:43:54.160
and Benefits the Banks by Regulating the Capital Market.

416
00:43:54.160 --> 00:43:56.000
Now, we seem to do the reverse.

417
00:43:56.000 --> 00:43:58.040
So maybe, you know, we're going to move

418
00:43:58.040 --> 00:44:02.040
towards a better blend of the top and the bottom,

419
00:44:02.040 --> 00:44:06.840
the north and south of boxes, if you will, on chart one.

420
00:44:06.840 --> 00:44:08.320
So ownership is even issued.

421
00:44:08.320 --> 00:44:09.920
The last take, the U.S. and say,

422
00:44:09.920 --> 00:44:13.040
look at the U.S. organizational chart.

423
00:44:13.040 --> 00:44:15.400
When you look at the U.S. in table four,

424
00:44:15.400 --> 00:44:17.240
it says corporate organizational form.

425
00:44:17.240 --> 00:44:18.480
Look at the U.S.

426
00:44:18.480 --> 00:44:22.600
See, you can't put the U.S. on the same table as the other countries because there are too

427
00:44:22.600 --> 00:44:23.600
many boxes.

428
00:44:23.600 --> 00:44:24.600
Okay?

429
00:44:24.600 --> 00:44:29.400
And notice there, you say restricted, prohibited, here you have to say limited and various.

430
00:44:29.400 --> 00:44:30.400
Okay?

431
00:44:30.400 --> 00:44:34.480
To put this together required the attorneys, okay?

432
00:44:34.480 --> 00:44:39.360
I have a former student of mine, George Washington, who happens to be head of one of the divisions

433
00:44:39.360 --> 00:44:43.900
at OCC, so she's a very good attorney, and the general counsel.

434
00:44:43.900 --> 00:44:47.960
So they put a group of attorneys out, and the attorney said, we can't do it for the

435
00:44:47.960 --> 00:44:53.440
I said, look, should OCC issue a document so we can tell about, you know, what can be

436
00:44:53.440 --> 00:44:58.200
done in a holding company or a bank or a subsidiary bank for all these other countries?

437
00:44:58.200 --> 00:45:01.040
18 of the 19 are, well, we can't do it for the U.S.

438
00:45:01.040 --> 00:45:05.320
I said, OCC wants to admit publicly, we can't, it's too complicated.

439
00:45:05.320 --> 00:45:09.400
Does it suggest something's wrong if you can't tell what's being done where?

440
00:45:09.400 --> 00:45:12.960
And so the attorneys worked on it and they said, you have a point, I guess it would be

441
00:45:12.960 --> 00:45:13.960
embarrassing.

442
00:45:13.960 --> 00:45:19.160
See, to omit the U.S. and say, we can do it for every country but our own country.

443
00:45:19.160 --> 00:45:23.560
So all the footnotes here see are meant to provide the qualifications.

444
00:45:23.560 --> 00:45:27.560
Now I took a crack at it when they said we can't do it, then I filled out the box and

445
00:45:27.560 --> 00:45:34.060
I said, well, this will, we won't say source OCC, and it turns out it's interesting when

446
00:45:34.060 --> 00:45:35.360
you look at what happened.

447
00:45:35.360 --> 00:45:41.960
We priced it based upon failures of banks, state and national banks from the 1860s all

448
00:45:41.960 --> 00:45:46.400
All the way through the 1930s, that's how we decided how we were going to price it and

449
00:45:46.400 --> 00:45:52.240
we set the price a bit low thinking that never again with all the good regulatory apparatus

450
00:45:52.240 --> 00:45:55.040
in place, the losses would be a bare minimum.

451
00:45:55.040 --> 00:46:00.100
See once we had depositors, when we established the federal bank system, it feels like after

452
00:46:00.100 --> 00:46:04.940
I said, with all these great people and the government now supervisor regulated, we wouldn't

453
00:46:04.940 --> 00:46:06.720
have losses again.

454
00:46:06.720 --> 00:46:11.240
That would amount to anything until the 1980s, honestly.

455
00:46:11.240 --> 00:46:18.400
So all the countries now are running fairly rapidly to do what? Adopt Federal Deposit

456
00:46:18.400 --> 00:46:23.560
Insurance systems, regulatory systems, beefing up their staffs and those things. So what

457
00:46:23.560 --> 00:46:29.000
we have is a mad dash, I would say, with the encouragement of the IMF, the World Bank and

458
00:46:29.000 --> 00:46:34.640
just about everybody else to establish a system that works. Even though there are some countries

459
00:46:34.640 --> 00:46:38.840
in which they haven't had deposits, there have not been government deposits, which they

460
00:46:38.840 --> 00:46:47.760
and so you have to ask yourself is the deposit insurance system in some sense a way in which

461
00:46:47.760 --> 00:46:54.920
to minimize banking type problems or is it a way to exacerbate or precipitate banking

462
00:46:54.920 --> 00:47:01.520
type problems and when you look here you find that we have who supervises is even an issue

463
00:47:01.520 --> 00:47:05.120
should it be the central bank should they also be involved in regulating supervising

464
00:47:05.120 --> 00:47:08.520
of Banks, if you have deposit interest and therefore you argue that's a rationale to

465
00:47:08.520 --> 00:47:14.440
regulate and supervise banks, if there were no other rationales.

466
00:47:14.440 --> 00:47:18.520
Well it turns out in some countries, about 50% of these countries, the central bank is

467
00:47:18.520 --> 00:47:23.560
involved in regulation and supervision to examination, like in the U.S. and other countries.

468
00:47:23.560 --> 00:47:28.520
That's not the case, but we have the most regulators, okay, we create more jobs for

469
00:47:28.520 --> 00:47:33.860
the regulators because of the dispersed nature of regulation in this country.

470
00:47:33.860 --> 00:47:37.340
probably doesn't make a lot of sense, we don't need as many regulators. Now some

471
00:47:37.340 --> 00:47:39.940
say it's good to have multiple regulators because they compete with one

472
00:47:39.940 --> 00:47:44.540
another. Sometimes it's the benefit of the marketplace. I think of the example of

473
00:47:44.540 --> 00:47:49.060
Wisconsin, the state regulatory authorities provided their institutions

474
00:47:49.060 --> 00:47:53.220
with the ability to offer just-to-write mortgages and it wasn't so with the

475
00:47:53.220 --> 00:47:57.580
federal government, largely because in the mid-1970s what happened,

476
00:47:57.580 --> 00:48:01.580
William Proxmire, then chairman of the Senate banking committee, got a notice that his

477
00:48:01.580 --> 00:48:31.580
mortgage payment was being increased. He got outraged. He says, why is it? He says, you have what's called an arm, an adjustable rate mortgage. He says, what is that? He said, I thought there was nothing but fixed mortgage. Why should homeowners have to pay more, as say, market interest rates go? That's outrageous. That destroys the ability of people to stay in their homes. If their payments can go up, it might be that they, you know, it takes away from the food budget, other budgets, they might default. That's bad. We want to promote homeownership. So the Congress, he and his colleagues

478
00:48:31.580 --> 00:48:38.340
and more. No adjust rate mortgages for any institutions nationwide. Then of course that

479
00:48:38.340 --> 00:48:43.020
was the mid-19th century. So lo and behold, interest rates went up, fixed rate mortgages,

480
00:48:43.020 --> 00:48:48.500
savings loans went into the tank. Who benefited? Homeowners. Who suffered? We just shifted the

481
00:48:48.500 --> 00:48:54.520
risk from the people who got the mortgages to the institutions. They finally said, gee,

482
00:48:54.520 --> 00:48:58.580
why did that happen? Do you think those institutions were being run by fools? They would not have

483
00:48:58.580 --> 00:49:02.700
have offered adjusted rate mortgages or Gerber. They were prohibited from doing so, and they

484
00:49:02.700 --> 00:49:07.460
got other benefits, presumably, and they didn't have to in a stable interest rate environment.

485
00:49:07.460 --> 00:49:12.180
But that tells you how we got fixed rate mortgages. It wasn't just the institution's desire to

486
00:49:12.180 --> 00:49:17.660
do so. And when you look here, look at who administered the insurance scheme, the funding

487
00:49:17.660 --> 00:49:22.860
is at Exxon TX Post, and the dollar amount. Now, the INS says the amount of insurance

488
00:49:22.860 --> 00:49:27.380
should be three times per capita income. That's the rule of thumb. And they want every country

489
00:49:27.380 --> 00:49:32.340
of the World, all 200 countries, if that's how you do it, to have three times, they want

490
00:49:32.340 --> 00:49:38.620
all to have federal deposit insurance, they want the central bank to be involved in regulating

491
00:49:38.620 --> 00:49:42.740
institutions, and they want it to be three times per capita income and increase.

492
00:49:42.740 --> 00:49:45.980
Now, you have to say, why three times per capita income?

493
00:49:45.980 --> 00:49:46.980
How do you price it?

494
00:49:46.980 --> 00:49:52.340
And they want all schemes to be ex-ante, I'm sorry, ex-post, no way, I'm sorry, ex-ante,

495
00:49:52.340 --> 00:50:00.340
No Exposed Deposit Insurance, all government-administered, and they want, of course, the IMF to play one

496
00:50:00.340 --> 00:50:07.900
of the key agencies in international or global bank regulation, which makes sense, if you're

497
00:50:07.900 --> 00:50:13.020
there to do those sorts of things, and I think it's an idea.

498
00:50:13.020 --> 00:50:15.700
I don't know that it's yet an issue that...

499
00:50:15.700 --> 00:50:23.440
My only point would be it merits public discussion, an airing of a debate among the Congress and

500
00:50:23.440 --> 00:50:26.200
others saying, well, what about global regulations?

501
00:50:26.200 --> 00:50:30.060
But about the time we get to debate, they already will have been imposed and we won't

502
00:50:30.060 --> 00:50:32.500
already have these systems in place and all these other.

503
00:50:32.500 --> 00:50:34.580
It is as fast as I am in Afghanistan and we're back.

504
00:50:34.580 --> 00:50:38.300
They've gotten their troops all over the globe imposing.

505
00:50:38.300 --> 00:50:39.300
And it's not bad.

506
00:50:39.300 --> 00:50:40.300
I haven't done it.

507
00:50:40.300 --> 00:50:43.860
I've been offered the opportunity to go to some of these countries and do their system,

508
00:50:43.860 --> 00:50:55.860
And it's amazing how many banking experts there are now in different institutions who tell me, I just came back, boy, it was fun setting up with the positive insurance system.

509
00:50:55.860 --> 00:51:00.860
I read a few papers, went over there and told them what to do. And that's the mentality.

510
00:51:00.860 --> 00:51:10.860
I'm not saying it's bad, these aren't smart people, but you wonder if that's what we should be doing, if it's the right way here in other countries.

511
00:51:10.860 --> 00:51:40.860
And the last thing I'll close on is, you can get into trouble talking about things, I made the fine comment, somebody who said, well you know banks get a lot of insured deposits, those insured deposits help house America, all those sorts of things, and I said well look, it turns out only about 50% of all the assets of all depository institutions in this country, and they have about 5-20 million assets, are funded with federally insured deposits, meaning they're not absolutely central. It used to be much higher going back in time.

512
00:51:40.860 --> 00:51:56.860
So about 50% of federal, meaning they can fund half their assets with non-federal insured deposits, and in some banks, big banks, only 20% of their assets are funded with federal insured deposits, suggesting that they really need those federal insured deposits.

513
00:51:56.860 --> 00:52:04.860
And only approximately 15% of all the assets of all financial firm and service in the United States are funded with federal insured deposits.

514
00:52:04.860 --> 00:52:10.860
and then the question is have we reached this stage which maybe we should do away with federally insured deposits.

515
00:52:10.860 --> 00:52:30.860
A mutual fund is not unlike, is effectively, you can do banking transactions with a mutual fund and if you give them access maybe to the Fed wire, you know, the federal clearing system, you have 100% capital and it turns out you don't have federal deposit insurance.

516
00:52:30.860 --> 00:53:00.860
But I made this kind of passing reaction to another person who was speaking about the 15% being funded and a financial institution person, a big, mid-sized institution company, he says, well, he says, you know, I'm really troubled by your talk, I said, oh, my talk, he said, yes, well, yeah, you kept on, you were harping about the fact that we don't need to federalize, I didn't say that, no, he said, well, you said that 15% of the aspect, he says, now, by your saying that,

517
00:53:00.860 --> 00:53:06.860
You're going to frighten or you're going to give the impression to people that institutions don't need federally insured deposits.

518
00:53:06.860 --> 00:53:10.860
He says, and I said, well, do you? He says, we get it. Yes. I said, well, why?

519
00:53:10.860 --> 00:53:14.860
Now, of all the things you heard me say, I'm Mitch Ipat and he was very irritated with it.

520
00:53:14.860 --> 00:53:18.860
He said, you know, it's people like you, you know, typical academic, you don't know the real world and that.

521
00:53:18.860 --> 00:53:23.860
I went through that for a few minutes as we were fortunately having a drink so I could better tolerate it.

522
00:53:23.860 --> 00:53:30.360
But it turns out, and I said, you know, notice everything, I said, he forgot about the multi-component

523
00:53:30.360 --> 00:53:35.360
because he runs an institute. He says, we're men's size. He says, we get a subsidy. I said, oh, you do.

524
00:53:35.360 --> 00:53:40.860
And I said, I'm helping pay for it, others. He says, well, that's not my point. He says, my point is we get a subsidy.

525
00:53:40.860 --> 00:53:47.860
He says, our return is about 50 basis points on assets, let's say. And I said, well, what's the subsidy?

526
00:53:47.860 --> 00:53:53.360
He said, about 50 basis points. And he said, so if you take away the insured deposits or you do away with the subsidy,

527
00:54:23.360 --> 00:54:35.360
And guess what? Some people are saying this subsidy really doesn't exist. Is there a subsidy? Well, he comes blatantly out and that's newsworthy to say, I wouldn't exist without the subsidy.

528
00:54:35.360 --> 00:54:45.360
But in any event, it is an issue. And the question is, we have to ask, should that particular institution be getting that subsidy?

529
00:54:45.360 --> 00:54:55.360
Is it appropriate or not? Do we think because of that, they're attracting funds and funneling them to public goods, merit goods, housing as a merit good.

530
00:54:55.360 --> 00:55:02.360
Is that what we want to say? Is there some failure that is being corrected with offering that type of insurance today?

531
00:55:02.360 --> 00:55:12.360
Well, I've gone on, you've been patient and let me sort of semi-spiel listening to me, but I would encourage all of you.

532
00:55:12.360 --> 00:55:22.360
I think this is a very interesting area, and for me, to be quite honest, you can see there are no equations, no statistics, I mean, statistical analysis, which I used to like to do a lot of.

533
00:55:22.360 --> 00:55:39.360
But unfortunately, this is an area in which I've come to appreciate the fact that not everything can be easily quantified in a model, or easily, no offense to some of you, but easily use econometrics,

534
00:55:39.360 --> 00:55:45.640
and Metrics, which is my, at one time I always thought if it was anything I did, it was viewed

535
00:55:45.640 --> 00:55:50.560
as scarily, there had to be equations, but I found in this area, trying to talk about

536
00:55:50.560 --> 00:55:56.200
corporate governance, and there are, as Clara well knows, a lot of people do some good work

537
00:55:56.200 --> 00:56:00.080
in this area, and Clara works in this area too, in corporate governance, but it turns

538
00:56:00.080 --> 00:56:06.880
out that part of it is, I can't get my hands on some of these issues without some simple

539
00:56:36.880 --> 00:56:49.880
Obviously, people in this room, Leman obviously knows more about many of these things than I do and many others and knows clearly the history and the writings of many others better than I do.

540
00:56:49.880 --> 00:56:59.880
When you go back though, you can't but they appreciate the fact there are so many people who have written and told some of the stories that I now try to tell, long before me.

541
00:56:59.880 --> 00:57:09.880
Long before me, that is, look at the writings in the 1930s and earlier ranks, you'll be impressed that they identified issues and talked about many of these sorts of problems.

542
00:57:09.880 --> 00:57:14.880
And it's nice to look at other countries, but always appreciate the fact that others have written about these issues.

543
00:57:14.880 --> 00:57:21.880
But sometimes we overlook the fact that if I didn't see a model, I didn't see some statistics, I may not have done some of that reading.

544
00:57:21.880 --> 00:57:22.880
Banking.

545
00:57:22.880 --> 00:57:28.660
So all of us, I think, occasionally have a professional response, going to try to identify

546
00:57:28.660 --> 00:57:31.920
those who came before us and wrote about similar issues.

547
00:57:31.920 --> 00:57:36.880
So when I was looking at the same loan problem, I was impressed reading some of the literature

548
00:57:36.880 --> 00:57:39.600
of the 1930s and in the journals.

549
00:57:39.600 --> 00:57:41.840
The people wrote and identified the problems.

550
00:57:41.840 --> 00:57:47.400
They didn't use the exact language, but they really had very insightful analysis.

551
00:57:47.400 --> 00:57:52.080
And nothing was a surprise in the 1980s, that is, moral hazard, problems with banks and

552
00:57:52.080 --> 00:57:56.200
what happened. That all had been written about. Now, some of the modern-day writers ignore

553
00:57:56.200 --> 00:58:00.840
a lot of it, and you don't see a lot of citations or references to their earlier literature.

554
00:58:00.840 --> 00:58:06.040
That's sometimes a bit of a shame. But I would encourage you, those of you who are interested

555
00:58:06.040 --> 00:58:11.800
to look broadly at what's going on in these other countries and to go back. I'm very interested.

556
00:58:11.800 --> 00:58:16.020
See, in the U.S. I can go back and look there, but I don't know what happened in England

557
00:58:16.020 --> 00:58:21.420
in Germany, why they got the systems they did, the regulation. It's profoundly interesting

558
00:58:21.420 --> 00:58:25.280
because what we're trying to do is look out there and observe things and say, how do we

559
00:58:25.280 --> 00:58:30.740
explain them? Can we tell a coherent story as to why we see the things that we do? Is

560
00:58:30.740 --> 00:58:37.260
it market forces, you know, through competition that have propelled these financial systems

561
00:58:37.260 --> 00:58:43.380
in one direction? Or is it laws and regulations that have shaped the financial system? And

562
00:58:43.380 --> 00:58:48.180
Do we want to try to shift the system in some way? What's an ideal system?

563
00:58:48.180 --> 00:58:52.780
It's almost going back to what I call that phrase, first principles, trying to just say,

564
00:58:52.780 --> 00:58:59.180
well, you know, I used to say, saving goes to borrowers, you know, like it was so easy.

565
00:58:59.180 --> 00:59:01.780
And then, but then that's a relatively profound statement.

566
00:59:01.780 --> 00:59:05.780
Well, how do you go from saving savers to borrowers? How do the ones get there?

567
00:59:05.780 --> 00:59:08.980
And does it matter? Do they go through financial firms or capital markets?

568
00:59:08.980 --> 00:59:11.780
And why do we have differences in different countries?

569
00:59:11.780 --> 00:59:31.780
and it started to be pretty darn interesting to me and so I started to spend a lot of time leading some legal type guide and it's what other people have said and it's really sort of interesting and a lot of people, I think, or more people are interested and it attracts, incidentally, some of the people who work in this area are now a lot of attorneys.

570
00:59:31.780 --> 00:59:38.780
I think of Jonathan Macy, the guy named Mark Row at Glendale University's Wall School.

571
00:59:38.780 --> 00:59:43.780
There's Jonathan Macy at Cornell's Wall School.

572
00:59:43.780 --> 00:59:46.780
Some other people at Stanford University's Wall School.

573
00:59:46.780 --> 00:59:50.780
So a couple of people I know in the law faculty that I communicate with,

574
00:59:50.780 --> 00:59:56.780
a bunch of interesting people, because it does involve laws and regulations, finance and economics.

575
00:59:56.780 --> 00:59:58.780
Okay, Jim?

576
00:59:58.780 --> 01:00:01.780
Well, I'm afraid we're out of time, but thank you very much.

577
01:00:01.780 --> 01:00:02.780
No questions?