The Banks Should Hold More Capital

Now, back to the regulators. Here is Britain’s main man, Adair Turner of the Financial Services Authority, in The Wall Street Journal:

“Cash is for buffers, not for wallets,” says the headline. Mr. Turner is making the point we have made many times. The US system of capitalism has become a system where the capitalists have no capital. The big banks have too little in savings…not enough ‘buffers’ to protect them from unexpected crises. They made a fortune during the boom years – loading consumers up with debt. But instead of holding onto the money to protect themselves against emergencies, they paid it out in bonuses and salaries. Then, when the crisis came – one they caused – they were without sufficient funds.

What do you do when you’re a major bank and you are insolvent? Hey, you already know the answer. You turn to the government! Which is why Mr. Turner’s comment is both very smart and very dumb at the same time. He’s right; the banks should hold more capital. But the reason they don’t is obvious: they know the government will bail them out. They figure they don’t need much capital; the feds have plenty.

This is the problem economists call “moral hazard.” If you protect people from their own excesses they will become even more excessive. On the other hand, if they have to pay for their errors, they’ll be quicker to correct them.

Okay…well…maybe the banks still wouldn’t save enough. But that would take care of itself. If the feds didn’t intervene, the insolvent banks would go under; those left would – by definition or accident – be better run.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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