Sunday, October 05, 2008

Klinging to the fragments of a shattered world view

Arnold Kling has a proposal

My alternative is to encourage new lending by lowering capital requirements at the margin. Tell banks that loans issued after September 1, 2008, require half the capital of similar loans issued before September 1. Some banks are in such bad shape that even with those lower capital standards they will not be able to make new loans. Fine. You don't want those banks to grow. But other banks have room to grow, and you want them to grow more than they would under the existing regulations.

I'd place Kling's idea in the trash can along with suspending mark to market.

I recall what happened the last time capital requirements were relaxed (2004) they were relaxed for "investment banks" a strange 20th and early 21st century type of firm which doesn't exist anymore.

I think the idea of more flexible rules for "new loans" is silly. Old loans can be made new by paying them back and relending. I don't think it would be practical to keep the lower requirements at the margin.

The issue clearly isn't excessive capital requirements. If it were, the equity of seized banks would be very valuable. In fact, they seem to be worth less than their debt, that is, they broke the 0% equity line not just the 12% (or whatever) equity capital requirement.

Basically in the face of overwhelmingly strong evidence that deregulation endangered world capitalism, Kling insists that the problem must be excessive regulation.

via Kevin Drum who provides a typical link from Mother Jones to a Cato paper.

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