With all of the criticsm that followed Fischer's model there were some who supported his ideas. Practical bankers welcomed his ideas, although it was mostly because Fischer's ideas were in support of deregulation in the banking industry.
Fischer argued that regulation distorts banking practices and makes them inefficient, which provides opportunities for profit.
A for Hoyt.
ReplyDeleteThere's a lot going on this section; I'm guessing, but I wonder if Hoyt's post is so short because he doesn't understand most of it. Fair enough — that's why I'm here!
The currency school tradition is that money matters but credit does not. Black argued against this. His position is similar to the real business cycle concepts that took macroeconomics by storm in the mid-1980s: that credit is most important, and it is determined inside the economy rather than being forced on it by a policy from the outside.
The upshot of Black's view is that equilibrium in financial markets is distorted by monetary policy, and this creates profit opportunities for traders. As a matter of fact, he argued, using conservation of value (remember the 7 things we know in finance) that what traders make must have been lost by the central bank in conducting their policy. This is 35 years ahead of the claims that TARP and other bailouts were bad because they benefited Wall Street at the expense of Main Street.
I also love that he's quoted in 1973, in a book written years before our ongoing financial crisis, that banking is the most regulated industry out there ... because just about everyone claims that the problem is lack of regulation. They must not have noticed all the paperwork they have to file for a loan.
Black also foresaw almost 40 years ago that banking isn't really about providing liquidity as it is about loan administration and fund transfer processing. Banks had a rough time over the last 3 years. Yes, they had liquidity problems, but these were solved over the space of a few months using textbook methods. Yet, they still have solvency problems because their business lines are sometimes fundamentally inadequate. You can see this in that most of the complaints about government interference in banking that led to the crisis are complaints that the government 1) goofed up loan administration by banks (by making them hit politically motivated targets, an 2) goofed up their transfer fund processing by not keeping up with non-bank financial firms ability to transfer funds in ways banks weren't allowed to.
Black also anticipated most of what we take for granted these days: national banks, risk-based capital management (instead of fixed reserve ratios), and long-term rates that are more closely tied to short-term rates.