tag:blogger.com,1999:blog-8764541874043694159.post6037880909202726325..comments2024-03-29T09:34:18.837+00:00Comments on Coppola Comment: Risk versus safety, bank reform editionFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-8764541874043694159.post-8536022393513164442013-03-17T01:28:56.913+00:002013-03-17T01:28:56.913+00:00cig
The implications of your comments about risk ...cig<br /><br />The implications of your comments about risk and return are important. I'm wary of fallacy of composition though. There is an element of gambling in the decision to invest in higher-risk stocks, which suggests that although the data imply there is no risk premium overall, the distribution of returns is sufficiently uneven to create a reasonable chance of doing better than the price would suggest. (Or doing worse, of course.) Although this could all be in investors' minds. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-88353177087733710082013-03-17T01:25:11.821+00:002013-03-17T01:25:11.821+00:00Thanks. I'm going to re-post your comment on m...Thanks. I'm going to re-post your comment on my new post about Cyprus, so that others can read it. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-21316362728031969202013-03-16T23:16:51.208+00:002013-03-16T23:16:51.208+00:00- agreed, transaction float is a practical problem...- agreed, transaction float is a practical problem for an 85K limit, but probably fixable, e.g. by mandating the moving of any overnight (or weekend) surplus to short gilts automatically.<br /><br />- yes higher returns are numerically possible, it's just that you don't see them in the data empirically. And it's true of almost all asset classes, from loans to options through horse racing, one of the few reliable results in finance! Then, why take risk? When 2 products are interchangeable the demand will split among them (two similar restaurants opposite each other on the same street will split the custom). So even if investors have no return-based reason to choose between a portfolio of large cap loans or one of SME loans, or stocks, or whatever else mid-risk thing where the specific risk can be diversified away, they have to put their money somewhere and will spread around according to non-risk randomness, like the punters and the restaurants. There does seem to be a premium above totally risk-free, so you do usually get compensated for making the jump from gilts to anything else, but that's all, apart from returns collapsing again with extreme risk, e.g. lottery tickets or AIM mining stocks.cighttp://commentisglee.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-55120140710975445322013-03-16T23:01:42.462+00:002013-03-16T23:01:42.462+00:00Tweet:
Frances_Coppola The Cyprus bail-out: Unfair...Tweet:<br />Frances_Coppola The Cyprus bail-out: Unfair, short-sighted and self-defeating | The Economist econ.st/Yijtsv <br /><br />Recent History on the Matter:<br /><br />Was this a False (Insider?) Prediction that possibly Cost People Money According Following Link?:<br /><br />"The government has managed to avert a haircut on bank deposits and the issue is no more on the table, according to a close associate of President Anastasiades.<br /><br />DISY part deputy chairman Averof Neophytou said that the government's efforts are now centred on keeping the corportate tax at its present 10 percent level."<br /><br />http://www.cybc.com.cy/en/index.php/cyprus-news/item/2575-1<br /><br /><br />Does This Fit?:<br /><br />"Mr. Averof Neophytou, Deputy President of DISY has supported the campaign to save the Cyprus Grass Snake..."<br /><br />Does he have a sense of humor?<br /><br />http://rochfordessex.net/cyprusreptiles/tag/averof-neophytou/<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-26933773284078568772013-03-16T19:54:22.507+00:002013-03-16T19:54:22.507+00:00cig
I agree generally, though I too can do some n...cig<br /><br />I agree generally, though I too can do some nit-picking...<br /><br />- there is a huge problem with the £85k limit for current accounts. Current accounts are simply a form of deposit account from which banks will make payments and which may have a revolving credit facility attached (overdraft). Large payments such as property sales go through current accounts. Unless you distinguish between current accounts and other forms of deposit account, your £85k legal limit would make receiving payment for a house sale impossible. Not everyone immediately puts those funds into buying another house, you know. <br /><br />- I agree that the higher price of higher risks is simply a representation of expected losses across the totality of loans in that asset class. But in a given portfolio, there is a possibility of higher returns because losses may not be as large as the price suggests. Conversely, they could be larger of course - that is the risk you take. If you had no prospect of making higher returns (a gamble, if you like) there would be no point in taking any risk, would there? <br /><br />- I personally think the preferential tax treatment of debt should be ended. I don't see any real objections to this. <br /><br /> Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-81005450596454876702013-03-16T18:00:13.470+00:002013-03-16T18:00:13.470+00:00I agree with your main points (that the problem is...I agree with your main points (that the problem is demand, and the policy contradictions re more/less risk), but some nitpicking:<br /><br />Insured savings (deposits) are synthetic gilts (synthetic CB reserves) really, so they should return the same. All kind of things break down (monetary policy transmission for instance) when you have different wrappings of the same asset behave differently. Hard to explain to retail though... A good first step would be to make deposits above the insured limit illegal, so max 85K per customer per group in savings accounts, and if someone wants to have uninsured savings with their bank, they can buy bonds of said bank in the brokerage section of their account, and if they want insured, they can buy gilts (that's your voluntary insurance scheme, it's there already, no need to duplicate it).<br /><br />"Lending only to the best risks does not make for good returns on savings." I think that's just a reiteration of the empirically incorrect "high risk high return" meme. Over the cycle all risk categories will tend to return the same net of losses: you're not going to get paid for risk that can be mutualised (it follows from the scarcity of free money theorem).<br /><br />Also what proportion of bank asset does SME lending form? I bet it's tiny, so even if you say doubled it it would barely move the needle re the banks' risk (or return if it did return more).<br /><br />One way the government could help SMEs without the banks getting involved is to promote more equity via the tax treatment, to encourage savers to fund SMEs, or even direct equity investment from the state in SMEs. Hard to do though: VCT/EIS schemes do the tax thing and seem a mixed blessing, direct government investment is a minefield, but then so are loan guarantee schemes.cighttp://commentisglee.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-90284243914556985972013-03-15T04:47:14.463+00:002013-03-15T04:47:14.463+00:00Please expound upon "managing risks."Please expound upon "managing risks."Tom Usherhttps://www.blogger.com/profile/02621103117749829794noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-73320235944916753242013-03-14T13:56:56.624+00:002013-03-14T13:56:56.624+00:00Obviously you are right to say that “the more rule...Obviously you are right to say that “the more rules there are, the easier it is to find loopholes..”. In fact two Dallas Fed economists argued in the Wall Street Journal a day or two ago that Dodd-Frank is near useless because of its complexity. See:<br /><br />http://online.wsj.com/article/SB10001424127887324128504578344652647097278.html?mod=WSJ_Opinion_carousel_3#articleTabs%3Darticle<br /><br />However there is an EXTREMELY simple rule that can replace the hundreds of thousands of words that make up Dodd –Frank, Basel III, and Vickers. The rule is: “if you want your bank to lend on or invest your money, you carry the can if it all goes belly up”. That way, banks as such cannot fail, thus there is no taxpayer exposure. As to money that depositors want to be 100% safe, the money just ain’t invested or loaned on: it’s deposited at the central bank, or in the case of the UK, put into National Savings. Again, there is no taxpayer exposure.<br /><br />That system is full reserve banking. Full reserve is to economics as the theory of relativity is to physics: both ideas are beautifully simple and they solve numerous problems.<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-43198977559103110712013-03-14T11:27:23.731+00:002013-03-14T11:27:23.731+00:00Ralph,
yes, you have misunderstood. I was pointin...Ralph,<br /><br />yes, you have misunderstood. I was pointing out the conflict between the Government's economic strategy and the objectives of the Parliamentary Commission. It is not possible simultaneously to both reduce and increase risk in banking.<br /><br />I fundamentally disagree with you that safety can be externally imposed. There are no such things as "clear rules". And the more rules there are, the easier it is to find loopholes - as a glance at the tax system should tell you. Real safety can only come from within - through cultural change and comprehensive reform of banking practices. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-57267174125819573172013-03-14T10:46:59.281+00:002013-03-14T10:46:59.281+00:00Spot on.
I find the Goverment behaviour irrespons...Spot on.<br /><br />I find the Goverment behaviour irresponsible while i agree with the Parliamentary committee.<br /><br />The level of subsidy that the goverment is pushing towards the housing market is very high and should be stopped.<br />NewBuy, FLS and all the similar proposals from the goverment are only inflating the over-inflated housing bubble.<br /><br />I dont want to pay for these as a taxpayer.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-54687422102136595752013-03-14T10:35:33.719+00:002013-03-14T10:35:33.719+00:00Frances,
I don’t accept there is any conflict wha...Frances,<br /><br />I don’t accept there is any conflict whatever between the need for bank safety and the need for stimulus, which is what you seem to suggest (unless I’ve got you wrong).<br /><br />Government just doesn’t need banks if it wants to effect stimulus: to put it crudely, it can just print money and spend it into the economy. The latter would work even if banks didn’t exist, and everyone kept their spare money under their matress.<br /><br />Indeed the latter is more or less what Positive Money and other advocates of full reserve advocate. That is, they advocate forcing those bank depositors who want their bank to lend on their money to accept the risks involved. That would result in less lending. But the deflationary effect of that is easily dealt with, to reiterate, by having government / central bank create and spend extra money into the economy.<br /><br />That way, everyone has a larger stock of money, thus banks don’t need to lend so much.<br /><br />Next, you claim that “Real safety comes from professional risk management and commitment to customer service on the part of the banks themselves.” I suggest that is pie in the sky. The idea that the crooks, fraudsters, spivs and carpetbaggers who run banks will VOLUNTARILY suddenly become responsible is plain unrealistic. <br /><br />Banks need a clear set of rules to follow which make it impossible for them to have taxpayers pay for the risks they take when the risks go wrong. As Mervyn King rightly pointed out in his last appearance before the Baking Standards Commission, we (i.e. Vickers) have so far failed to do this.<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.com