Here's Gary Gorton's take on the shadows:
"Historically, during a crisis, banks have suspended convertibility, have been bailed out, nationalised, subsidised, covered by blanket deposit guarantees and so on. There is no case where a society intentionally liquidated its banking during a financial crisis. But here’s the rub: saving the banking system means saving the bankers. And that means that debate over reform is overtaken by anger at bankers."
True, but there's also a lovely paragraph that even Mark Thoma mentions which calls for a kind of re-tooling in our data collecting frameworks.
" Our measurement systems, national income accounting, regulatory filings and accounting systems are useful but limited. Market economies change. The financial system changes. Isn’t it clear that the measurement systems should also change to keep up? National income accounting, one of the greatest achievements of economics, was built largely as part of the second world war effort and intimately involved the government, which had an interest in understanding the capacity of economies to go to war. Now we need to build a national risk accounting system. The financial crisis occurred because the financial system has changed in very significant ways. The measurement system needs to change in equally significant ways. The efforts made to date focus mostly on “better data collection” or “better use of existing data” – phrases that, at best, suggest feeble efforts. A new measurement system is potentially forward-looking in detecting possible risks."
The problem with risk-reform and regulatory reform is that too many cooks spoil the brother. The biggest fallacy lies in thinking that a complex issue needs a complex solution. Nobody elucidates this better than Haldane in his Dog and the Frisbee speech a few months ago. Should it take an FSB report to start fearing the shadows again? As Gorton rightly says:
"One of the findings of the Financial Stability Board report is that the global shadow banking system grew to $62tn in 2007, just before the crisis. Yet we are only now measuring the shadow banking system. How did such a banking system grow without us noticing – and could it happen again? So a second crucial issue is measurement, in the new world of derivatives, off-balance sheet vehicles, securitisation and new forms of money."
"Historically, during a crisis, banks have suspended convertibility, have been bailed out, nationalised, subsidised, covered by blanket deposit guarantees and so on. There is no case where a society intentionally liquidated its banking during a financial crisis. But here’s the rub: saving the banking system means saving the bankers. And that means that debate over reform is overtaken by anger at bankers."
True, but there's also a lovely paragraph that even Mark Thoma mentions which calls for a kind of re-tooling in our data collecting frameworks.
" Our measurement systems, national income accounting, regulatory filings and accounting systems are useful but limited. Market economies change. The financial system changes. Isn’t it clear that the measurement systems should also change to keep up? National income accounting, one of the greatest achievements of economics, was built largely as part of the second world war effort and intimately involved the government, which had an interest in understanding the capacity of economies to go to war. Now we need to build a national risk accounting system. The financial crisis occurred because the financial system has changed in very significant ways. The measurement system needs to change in equally significant ways. The efforts made to date focus mostly on “better data collection” or “better use of existing data” – phrases that, at best, suggest feeble efforts. A new measurement system is potentially forward-looking in detecting possible risks."
The problem with risk-reform and regulatory reform is that too many cooks spoil the brother. The biggest fallacy lies in thinking that a complex issue needs a complex solution. Nobody elucidates this better than Haldane in his Dog and the Frisbee speech a few months ago. Should it take an FSB report to start fearing the shadows again? As Gorton rightly says:
"One of the findings of the Financial Stability Board report is that the global shadow banking system grew to $62tn in 2007, just before the crisis. Yet we are only now measuring the shadow banking system. How did such a banking system grow without us noticing – and could it happen again? So a second crucial issue is measurement, in the new world of derivatives, off-balance sheet vehicles, securitisation and new forms of money."
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