Tuesday, October 14, 2008

Speaking Without Knowing

[UPDATE: Upon reflection, I was way too hard on David Bernstein in this post, and I shouldn't have been so mean-spirited. I had been working for 15-16 hours and was impatiently waiting for Westlaw to get its act together when I wrote this post, so my frustration level was, umm, high. That, combined with the fact that for the past week I've had to write uncharacteristically measured responses to motions that deserve mockery and ridicule, left me itching to tee off on somebody. I happened to disagree with something Bernstein wrote last night, so he was the unfortunate recipient of my frustration. I still disagree with Bernstein, but the personal insults were unnecessary and immature, and I've therefore removed them. In the future, I'll try not to write posts on the tail-end of all-nighters.]

An unfortunate consequence of the financial crisis taking center stage in the news is the barrage of commentary and opinion-pieces on the financial crisis from people who know absolutely nothing about financial markets. The offending commentary has come predominantly from the political arena—amateur political commentators (a category that includes political journalists and columnists, despite their claims of expertise) know even less about finance than they do about politics, and that's saying something. I make it a rule not to read any commentary on the financial crisis from a political commentator.

But some people who I do still read (though not specifically for financial commentary) are apparently afflicted by the same "speaking without knowing" syndrome as the political commentators when it comes to the financial crisis.

For example, on more than one occasion Will Wilkinson has confidently asserted: "We don't need more regulation or less. We need better regulation." Really? Wilkinson is a smart guy and I enjoy his philosophical writings, but I'm gonna go out on a limb and say that he doesn't know the first bloody thing about the regulatory structure currently governing the financial markets. It's incredibly complex, and something casual observers simply cannot pick up in a matter of weeks. It takes years for even financial market participants to learn, and most people on the investment side (as opposed to the legal side) still don't really understand a lot of the regulatory requirements. So how in the world does Wilkinson know that "[w]e don't need more regulation or less"?

Another example is the Volokh Conspiracy's David Bernstein. Commenting on how the Treasury made recapitalization of the 8 biggest U.S. banks with public funds mandatory, Bernstein wrote, "If any of the relevant banks is already well-capitalized, I hope its CEO tells Paulson to take his capital injection and shove it up his you-know-what." If any of the relevant banks isn't well-capitalized, and they accept Paulson's capital injection while another bank rejects the government money, the market will know that the banks that took the government money are weak. Those banks' lenders will then run for the hills, potentially forcing the banks into bankruptcy.

Later, in the comments, Bernstein writes, "[A]pparently Paulson has decided that the issue is not banks that 'need' the money, but that the feds need to inflate the money supply, and pronto, and the mechanism to do so is by giving money to major banks." Say what? The TARP isn't about recapitalizing the banking sector, but is instead about inflating the money supply? Even if Paulson was really trying to inflate the money supply (and I'm quite certain that's not the true goal), there are much better ways to accomplish that goal. Inflating the money supply by recapitalizing the banking sector would be about as roundabout and ineffective as it gets.


travis said...

You assume that if *all* banks get capital then *all* the banks will now be trusted by investors. Instead, it's highly likely that the bad banks won't have received enough capital because it was spread too thinly. Without disclosure, investors won't trust that any bank is safe and thus avoid all banks.

The new debt guarantee is the much bigger aid. It eliminates risk for new investors. So the banks should be able to borrow without much problem. Of course, there are still a lot of problems with the new guarantees.


Knowing without speaking.