Wednesday, June 22, 2011

The Truth About Bank Capital

Robert Teitelman

Joe Nocera in the New York Times has decided he's in favor of more bank capital. In his column, he makes this seem like his personal endorsement is necessary to push across the line what he calls "the most important reform moment since the financial crisis broke out three years ago. More important even than the wrangling over Dodd-Frank." Well, this falls within the pundit's right to hyperbole, as the headline on the column, "Banking's Moment of Truth," falls within the bounds of the headline writer's exaggeration exemption -- though the more I look at it, the more that "truth" bothers me. Personally, turning to the most important person in the world -- moi -- I would, if forced to take a stand, vote for higher capital standards for the big banks, though the question is not nearly as clear and straightforward as Nocera makes out. There's not a lot of "truth," or a lot of empirical economic evidence arrayed against any of this. There's intuition, gut feel, a sense that something must be done and lots of credentialed and noncredentialed opinions. Both Dodd-Frank and the bank capital standards are classic economically driven arguments that will be judged by future performance and consequences that, unfortunately, we have no way to predict. It's like voting for a president.

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