At the Cato Institute Monetary Policy Conference, Part 4

Panel:

Rep. Jeb Hensarling
Chairman, House Financial Services Committee

John A. Allison
President and CEO, Cato Institute, and retired Chairman and CEO, BB&T

Kevin Dowd
Professor of Finance and Economics, Durham University

Hensarling is going to have to run back to Congress.  Somewhat obsequious to the Cato Institute.

“When Democrats put ‘affordable’ in front of something, it somehow doesn’t work that way.”

Not a lack of regulatory ability, but timidity to use powers that they did have.

Fed had the ability to prevent the crisis and did little in the midst of the boom.  Toto has pulled back the curtain on the Fed; they are but mere men.  (DM: if that)

Dodd-Frank gives the Fed more powers that they will also not use.

Not a dual mandate, but multiple — add in market stability, low long-term rates, landlord for the CFPB.  Argues for auditing the Fed.  Also argues for cost-benefit analysis in gauging regulation.  Wants a lower attorney-to-economist ratio… Argues that Volcker rule harms corporate bonds — I find that unlikely.

He wants to regulate the Fed more tightly.  Where does the Fed deserve independence, and where not?

Seniors and savers punished.  Why is the Taylor Rule not followed?

Q&A

Disses CFPB, argues that people should be free to have more options in financing.

Q2 — gold & silver in the constitution, why is fiat money Constitutional?  Says that will be reviewed by the House.

Q3 — virtual currencies, and what should the Fed role on those.

Q4 — Asked about EPA.  Says it not his area.

Q5 — asked about Fannie & Freddie now that they have paid back… argues that have not paid it back.  They crowd out the private market.  Argues that monetary & fiscal policy is generally procyclical.

John A. Allison

Regulatory discipline will always trump market discipline.  Regulators are always late, even after failure, they tend to make matters worse.

Regulators regulate for regulatory good.  During booms, even if they find something fishy, if they speak up, it will be deemed speculative, and will lose politically.  So they say nothing during booms.

Regulators driven by politics — until Clinton, fair lending.  Bush, Jr. — Patriot Act, Sarbox, etc.  Bush did not deregulate.  Fed creates negative real rates and inflates the housing bubble.  Obama loves ALL regulation.

During bad times, regulators overdo it, which constrains credit.  Rule of law suspended, couldn’t predict what policy would be during the bailout.  Failure of mathematical modeling at banks and Fed.  Led to irrational risk taking.

Criticizes mathematical modeling because the tails are too small.  People become too complacent, because of the false precision of mathematics.

Small business lending is an art and a science.  When it is only a science, errors get made,and valid loans don’t get made.

Qualified lenders test — standards below subprime, with a lot of paperwork.  Can’t make the consumer loans on a decentralized basis because of the paperwork.

Fed is making it difficult to make loans. He would:

  • End deposit insurance
  • End the Fed
  • Go back to gold

He would end most regulations, and raise capital standards to 15-20% of assets.

Kevin Dowd (free banking advocate)

Pre-Fed bailouts were done by a coalition of the willing.  When the Fed came, many things that were self correcting were lost.

Easy money ’20s –> depression.  Easy money ’60s –> inflation. Easy money ’00s –> recession.  Now we try to inflate our way out.  Bigger bubble being created in government debt.

Will we finally let badly run banks fail?  Politics does not favor it.  Deposit insurance incentivizes moral hazard.  People stopped checking the solvency of banks.  Dodd-Frank 848 pages, and empowers regulators to create a lot of regulations off of committee studies.  (DM: not concerned with type II errors)

Securitizations, hidden hypothecations, SPV hide-and-seek, hidden rehypothecations — many ways to fuddle game-able regulations.  Also regulatory capture.  Volcker Rule was simple, but banks complexified it, and then argued that it was too complex to follow.

Regulation follows failure, and fights the last war.  Suggests double liability for bankers should be restored.

Q&A

Q1 — Allison for President?

Q2 — Comment on penalties on acquisition of failed banks?  Scare tactics.

Q3 — Where is the gold?  On the books of the Federal Reserve.

Q4 — How encouraged should we be on the economy, as much as Janet Yellen?  Allison worries, so does Dowd.  The Fed is creating the next crisis.

Q5 — Businesses are afraid of politics.  What can we do?  Allison: we need to encourage freedom, and avoid crony capitalism.  Big business has been aided by the crisis.