A few weeks ago James Kwak noted that Goldman had only $270 billion of assets in 1998, and asked, half-rhetorically, whether that was big enough, since Goldman was "probably doing a perfectly good job of serving their clients at the time." I thought the answer to this question was obvious, but I guess it's not, since this meme has apparently persisted.
The answer, of course, is that capital markets have exploded upwards since 1998. The international bond markets rose 157%, from $32.5 trillion in 1998 to $83.5 trillion in 2008; bond issuance rose 272%, from $654 billion in 1998 to $2.4 trillion in 2008; etc., etc. I don't have a lot of time, but I think these charts drive home my point.
Asking whether banks, which serve as market-makers in capital markets products, need to be bigger than Goldman was in 1998 frames the issue exactly wrong. The issue isn't how big market-makers need to be in order to provide adequate liquidity to the capital markets of 1998. The issue is how big market-makers need to be in order to provide adequate liquidity to the capital markets of 2009 (and beyond).
Thursday, November 19, 2009
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4 comments:
Mr. Kwak is a careless writer. He always seems to write first and ask questions later.
But of course one firm doesn't have to do all the market-making. It seems to me that if Goldman was big enough in 1998, then if we could have five firms doing the job instead of one, they would still be big enough.
And there might be a bit more competition to provide those services.
Kwak generally goes from conclusion to argument but leaving that aside maybe we also need to ask how big the capital markets need to be. I know that's a slippery slope but it seems their size relative to the growth of GDPs or whatever metric you might choose to put against them is outsized.
One can fairly ask whether an economy needs to have a capital market that grows exponentially relative to it. Much of what we now see looks like growth was in part based on innovation in technique and somewhat based on what looks underpricing and overuse of insurance.
Acting like judge and jury vis a vis Mr. Kwak is not very convincing. Makes me think the commenter is guilty of what he accuses Kwak of, carelessness as a writer.
Matthew says it well. Maybe more small firms do the job and keep down costs. On the other hand pooling of risk can be like a natural monopoly and larger markets may encourage larger firms and fewer firms. Hard to know definitely.
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