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Treasury Department’s Regulatory Overreach Expands

November 29, 2013 in Economics

By Louise C. Bennetts

Louise C. Bennetts

The Treasury Department’s Financial Stability Oversight Council (FSOC), having cast its regulatory shadow over the insurance industry, is now turning its sights on investment advisers.

At a time when we are trying to avoid creating the perception that certain large financial organizations are underwritten by the U.S. taxpayer, it seems foolhardy to label even more firms “systemic,” a euphemism for “too big to fail” (TBTF). Especially when there is no evidence that they operate in industries that are even remotely likely to create widespread problems for the financial system.

Insurance companies and investment firms now in their crosshairs.”

First, it is helpful to outline what makes banks “systemic,” and why other types of financial companies are different. In other words, why are banks prone to creating problems in the real economy if they fail en masse? The answer is: Banks borrow short and lend long, making them vulnerable to liquidity problems. Even a solvent bank can run into trouble if its depositors or other short-term creditors panic. This phenomenon is true of both traditional commercial and investment banks.

Commercial banks are largely deposit-funded and therefore prone to runs by retail depositors. Similarly, investment banks — which in the U.S. are not eligible to take or use insured deposits — fund themselves, using short-term sources such as overnight commercial paper or repurchase agreements.

Banks are the mechanism by which money flows through the economy, meaning that the failure of a large number of banks is likely to result in a sudden contraction in the money supply. Indeed, the problems in 2008 manifested initially through a run on the short-term funding used by investment banks and some commercial banks.

For this reason, banks are subject to special treatment by regulators. While it is not clear that this treatment has yielded better results, there is at least some logic to it.

But there is no logic in applying this regulatory attention to industries and firms that do not operate with a “maturity mismatch,” that is, borrowing short and lending long. Indeed, one of the most worrisome aspects of the Dodd-Frank Act has been the extension of bank-like supervision to other types of financial institutions.

As noted, Dodd-Frank gave the FSOC, an arm of the Treasury, the power to label nonbank financial companies — any company predominantly involved in finance — as “systemic.” But determining what makes a company a “systemically important financial institution” has turned out to be rather difficult.

Dodd-Frank …read more

Source: OP-EDS

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Ire Directed at Germany Is Not Just nitpicking

November 29, 2013 in Economics

By Steve H. Hanke

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Steve H. Hanke

Well, it’s official, the economic talking head establishment has declared war on Germany. The opening shots in this battle were fired by none other than the US Treasury Department, which had the audacity to blame Germany for a weak Eurozone recovery in its semi-annual foreign exchange report.

Despite Germany’s relatively strong recovery, the international economic establishment is none too happy about the country’s tight fiscal ship.”

The Treasury’s criticisms were echoed by IMF’s first deputy managing director David Lipton, in a recent speech in Berlin — a speech so incendiary that the IMF opted to post the “original draft” rather than his actual comments, on its website. Things were kicked into a full blitzkrieg when Paul Krugman penned his latest German-bashing New York Times column.

The claims being levelled against Germany revolve around nebulous terms like “imbalances” and “deflationary biases.” But, what’s really going on here?

The primary complaint being levelled is that Germany’s exports are too strong, and domestic consumption is too weak. In short, the country is producing more than it consumes. Critics argue that “excess” German exports are making it harder for other countries (including the US) to recover in the aftermath of the financial crisis.

While a review of international trade statistics is all well and good, the ire against Germany actually comes down to one thing: austerity. Despite Germany’s relatively strong recovery, the international economic establishment is none too happy about the country’s tight fiscal ship.

If only Germany would crank up government spending, then Germans would buy more goods, and all would be right in the Eurozone, and around the world — the argument goes.

Yes, the anti-austerity crowd has found a convenient way to both slam austerity and scapegoat one of the few countries to successfully rebound from the crisis. I would add that it is hardly a coincidence that this line of argument fits nicely into the fiscalist message of Germany’s Social Democratic party, with whom Chancellor Angela Merkel is currently trying to arrange a governing coalition.

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In recent years, the fiscalist crowd has advanced the one-dimensional argument that fiscal stimulus is the only way to save struggling economies in the wake of the crisis. This follows the standard Keynesian line: to stimulate the economy, expand the government’s deficit (or shrink its surplus); and to rein in an overheated economy, shrink the government’s deficit (or …read more

Source: OP-EDS