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This is like trying to predict earthquakes or hurricanes, they don't happen very often

Saturday, November 26, 2016 11:33
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From the BBC:

… Neel Kashkari, president of the Federal Reserve Bank of Minneapolis is proposing an alternative that may be more in line with Donald Trump’s way of thinking. He believes that banks should be forced to massively increase their capital reserves (1) – the amount of cash they are obliged to keep in hand for the day when everything goes wrong at once.

Currently, US banks need to keep 6% of what are known as their risk-weighted assets, a formula that values their their loan book, in cash. Under the so-called “Minneapolis Plan”, Mr Kashkari wants banks to significantly increase this ratio to up to 38%.

Neel Kashkari says [existing] measures to prevent another bank meltdown don’t go far enough:

“My highest focus is making sure we don’t have another financial crisis where the banks get into trouble and they have to turn to the taxpayers,” he told BBC World Service. We’ve looked at the history of financial crises – this is like trying to predict earthquakes or hurricanes, they don’t happen very often.(2)

“And if you look at financial crises all around the world, that’s the level of capital that we need to reduce the chance of a future crisis to as low as 10% over the next century.”

1) The word “reserves” is largely meaningless in this context as it can mean quite different things. “Cash” is as crystal clear as you can get.

2) He can’t have been looking hard enough, there has a been a banking crisis in the USA every 18 years or so since the early 19th century, interrupted only by the second world war (and the mid-cycle dip in the 1973-1989 cycle). The cycles in most other countries in the world have now synchronised with the US cycle (i.e. the last full one was 1989-2007). And these cycles always go hand in hand with land price bubbles; you can’t have a land price bubble without a credit bubble – a credit bubble will always go into higher land prices.

So as ever, the question is, is he deliberately lying or is he stupid?


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