Mervyn King tells the tale at the start of his lecture "Lessons from the Global Financial Crisis," inwards a phonation communication given upon receipt of the Paul A. Volcker Lifetime Achievement Award from the National Association for Business Economics (February 27, 2018). I'm quoting from the prepared text for the talk. Of course, King was Governor of the Bank of England from 2003-2013, piece Paul Volcker was Chair of the Federal Reserve from 1979-1987. This is how King tells the floor of their commencement coming together dorsum inwards 1991:
"I commencement met Paul inwards 1991 exactly after I joined the Bank of England. He came to London in addition to asked Marjorie Deane of the Economist journal to suit a dinner amongst the novel fundamental banker. The floor of that dinner has never been told inwards world before. We dined inwards what was in addition to so Princess Diana’s favourite restaurant, in addition to at the cease of the level Paul attempted to pay the bill. Paul carried neither cash nor credit cards, but alone a cheque book, in addition to a dollar cheque at that. Unfortunately, the eatery would non have got it. So I paid amongst a sterling credit menu in addition to Paul gave me a US dollar cheque. This suited us both because I had exactly opened an concern human relationship at the Bank of England in addition to been asked, rather sniffily, how I intended to opened upwards my account. What improve response than to tell that I would opened upwards the concern human relationship yesteryear depositing a cheque from the late retired Chairman of the Federal Reserve. I basked inwards this reflected glory for 2 weeks. Then I received a missive of the alphabet from the Chief Cashier’s business office proverb that most unfortunately the cheque had bounced. Consternation! It turned out that Paul had forgotten to appointment the cheque. What to do? Do you lot genuinely write to a old Chairman pointing out that his cheque had bounced? Do you lot but have got the fiscal loss? After some thought, I striking upon the perfect solution. I dated the cheque myself in addition to returned it to the Bank of England. They accepted it without question. I am hopeful that the statute of limitations is good past. But the episode taught me a lifelong lesson: to locomote effective, rule should focus on essence non form."Maybe you lot demand to locomote an economist to reckon the sense of humour inwards the story. But consider: One fundamental banking concern chair trying to pay amongst US dollars inwards a London restaurant, in addition to the other adding dates to person else's check. It's a floor that should crunch whatever doubts well-nigh whether fundamental bankers are fallible human beings.
The residual of the lecture has some skillful nuggets, tot. King points out that 10 years agone at this fourth dimension inwards 2008, nosotros were well-nigh 2 weeks earlier the failure of Bear Stearns. He says:
"During the crisis nosotros were vividly reminded of 3 old lessons. First, our organization of banking is fragile, in addition to reflects what I telephone telephone fiscal alchemy. Banks that look to locomote well-capitalised 1 twenty-four hours are non the next. Solvency is inwards the middle of the lender. Second, banks that borrow curt in addition to lend long are, every bit nosotros saw inwards 2008, dependent area to runs that threaten the payments organization in addition to thence the wider economy. Third, regulatory reform is well-intentioned but has fallen into the trap of excessive detail. The complexity of the electrical current rule of fiscal services is damaging in addition to unsustainable."One of King's proposals is for that fundamental banks should instruct what he calls the Pawnbroker for All Seasons. The sentiment is that rather than putting fundamental banks inwards a seat where, inwards an emergency, they confront a pick betwixt uncontrolled lending in addition to letting the fiscal organization melt down, nosotros demand a invention inwards advance. King suggests that banks piece of job amongst a fundamental banking concern to recollect well-nigh the value of the bank's collateral--say, the mortgages in addition to other loans held yesteryear the bank. The banking concern in addition to the fundamental banking concern together would concur that if a banking concern finds itself caught inwards a fiscal crisis, it would laissez passer this collateral to the banking concern inwards telephone substitution for a loan of a predetermined amount. King says:
"My proposal replaces the traditional lender of concluding resort function, in addition to the provision of deposit insurance, yesteryear making the fundamental banking concern a Pawnbroker for all Seasons. ... In normal times, each banking concern would create upwards one's hear how much of its assets it would preposition at the fundamental banking concern allowing enough of fourth dimension for the collateral to locomote assessed. ... Adding upwards over all assets that had been pre-positioned, it would in addition to so locomote clear how much fundamental banking concern coin the banking concern would locomote entitled to borrow – amongst no questions asked – at whatever instant. The pawnbroker dominion would locomote that the credit trace of the banking concern would have got to locomote sufficient to embrace all liabilities that could run inside a pre-determined menstruation of, say, 1 calendar month or perhaps longer. ...The system is non a pipedream. US banks have got pre-positioned collateral amongst the Federal Reserve sufficient to create a full lendable value of exactly nether 1 trillion dollars. Together amongst deposits at the Federal Reserve, the cash credit trace of banks is or so one-quarter of full banking concern deposits."King's betoken is that a bunch of complex fiscal regulations--where their rattling complexity way they tin locomote gamed--isn't a existent answer. Solemnly swearing that the fundamental banking concern won't lend inwards a crisis, in addition to volition exactly permit the fiscal organization melt down, isn't an answer, either. But thinking inwards advance well-nigh how much a fundamental banking concern would lend to a bank, based on the collateral that banking concern has available, could genuinely assist cushion the side yesteryear side (and at that topographic point volition locomote a next) fiscal crisis.
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