Wednesday, August 12, 2009

Too Big to Fail, or Just Too Big?

I just read a discussion paper by Dr James B Thompson of the Research Department of the Federal Reserve Bank of Cleveland (2009, “On Systemically Important Financial Institutions and Progressive Systemic Mitigation”), in which he proposes various criteria for identifying and supervising financial institutions that are “systemically important.” According to Dr Thompson:
Delineating the factors that might make a financial institution systemically important is the first step towards managing the risk arising from it. Understanding why a firm might be systemically important is necessary to establish measures that reduce the number of such firms and to develop procedures for resolving the insolvency of systemically important firms at the lowest total cost (including the long-run cost) to the economy.
Dr Thompson further argues that disclosing the identity of firms that may eventually be designated “systemically important” would require “constructive ambiguity” in order to ensure the market is not mislead into believing certain firms retain special dispensations in the form of government guarantees.
The choice of disclosure regime would seem to be between transparency (publication of the list of firms in each category) and some version of constructive ambiguity, where selected information is released… In the context of central banking and financial markets, the term [constructive ambiguity] refers to a policy of using ambiguous statements to signal intent while retaining policy flexibility. In the context of the federal financial safety net, many have argued for a policy of constructive ambiguity to limit expansion of the federal financial safety net. The notion here is that if market participants are uncertain whether their claim on a financial institution will be guaranteed, they will exert more risk discipline on the firm. In this context, constructive ambiguity is a regulatory tactic for limiting the extent to which de facto government guarantees are extended to the liabilities of the firms that regulators consider systemically important.
After considering Dr Thompson’s ideas, I am flabbergasted with doubts. My first is with regard to the dogma implied by “systemically important” (i.e., “too big to fail”). What does “systemically important” mean? What makes a company “systemically important?” Dr Thompson sidesteps the “too big to fail” proposition by coining the alternative phraseology, “systemically important,” which is equally lambaste with normative relativism. The entire concept of “systemically important” lacks content validity, both in rhetoric and substance. To say a firm is “systemically important” is just another way of designating the firm as “too big to fail.”

My second doubt centers on the need for “constructive ambiguity” in disclosing the identity of firms that are designated as “systemically important.” The suggestion that “constructive ambiguity” will somehow protect the markets is preposterous. What the marketplace needs today is greater transparency, not less. The very notion of “constructive ambiguity” is laced with deceit. Ambiguity can only further harm the stature and creditability of our financial markets, especially given the recent collapse of public confidence in the face of the ongoing economic crisis.

My final comment is to offer a new suggestion for dealing with firms that are either “systemically important” or “too big to fail,” and that is we treat such firms as simply too big to keep around. Firms that are so large as to become “systemically important” or “too big to fail” should be broken up into smaller companies, thus advancing the competitive spirit of the marketplace, while ensuring that no firm becomes so large as to be able to threaten the financial stability of our nation as a consequence of their misfortunes.



Wingnut said...


Hi! Saw your comment and blog-beg over at blogs.WSJ... so I thought I'd come visit. Too bad you don't allow anonymous posting here... maybe the traffic would pick-up a bit.

Its interesting that you said... "creditability of OUR financial markets". Why use "our" instead of "the"? Have you adopted it as YOURS?

Which "our"? I hope you're not trying to include "we" American Christian anti-capitalists in YOUR "our". There's a large group of "our" that want THE illegal pyramid scheme called capitalism... gone, and right now. Rat-race-causing economies and ownership gotta go... its inevitable. Equality always wins, not rat-racing inequality systems. Christian ways ALWAYS win-out in the end... so say goodbye to YOUR rat-racing money-chasing system. Its dead.

Now I'll hop off the soapbox and talk for a moment about "systemically important". Here's the ponder. Are there MANY little systems happening within the big socio-economic pyramid scheme? (See back of dollar for pyramid scheme symbol.) Is... electric workers... a "system"? Is "health care" a system? Is a mom'n'pop grocery store and its relationship-to and bonding-of a happy little neighborhood... a system? I'd say yes to all.

So, do you see that... when viewed from a Christian/discriminationless viewpoint, ALL LIVING THINGS are part of many big and little systems, and that makes every living thing... systemically important.

Now, when one isolates and specifies until they talk ONLY of YOUR financial system (AmWay coupons system/money)... its a rather narrow and ever-adjusting view. Lets look at two rather large sections of YOUR "earn'n'deserve servitude-based financial system. First, you have those whose lives are IMPROVED because of using coupons/money. And then, the other group, the group whose lives are under attack from money/bills from YOUR earn'n'deserve pyramid-o-servitude. Two quite different, and yet likely important systems, yes? They are groupings caused by using a certain grouping criteria or characteristic. Groups = systems. And since any "chunk of people" can be divided up using one or more of MANY MANY grouping-criteria, that indicates that there are MANY interleaving systems happening within other systems. It all depends upon what criteria is used to decide groupings/systems. With me, Doc?

Wingnut said...


Speaking financially-ONLY, and when using servitude-infested pyramids like capitalism, we see an EXACT copy of the childhood pyramids we repeatedly failed-at in the playgrounds. There is an upper 1/3 whose "heads in the clouds" and there is a middle-class 1/3 who are enjoying SOME "fat" from billings/timecardings and getting SOME weight taken off their backs via "getting a leg up" over and over. And then... there's the dreaded foundation to the pyramid... the lower 1/3... those who scurry back and forth between slavecorp jobs and hospitals... to fix crushed backs... from having the weight of the world's knee's uponst. By the way, all pyramids eventually collapse, and capitalism is no different.

Which (area of the financial-) system? When "the problem" is viewed from upper classes, certain things are systemically important and other things are not. Mostly, things within THAT particular system where-from THAT perspective is being viewed... are important. And so, when viewed from the middle class, a different group of "systemically important" pertains, and from vertebrate-crushing levels of the inequality festival, yet another "system" is pertinent. With me? Thoughts?

I just wish folks would stop fighting OVER money, ownership, and power... and start fighting to get themselves un-addicted to USING money, ownership, and power. There's nobody to lynch for the freemason/illuminati pyramid scheme that everyone got conned-into and/or forced-into joining... all its inventors are long-ago dead of old age. It just needs to be escaped, now. As I said over at WSJ, not a single other living creature on the entire planet... uses economies/ownership. Why do "our" capitalists do so? Do you think the Christians will ever arise and spank the cookieplate-chasing capitalism joiners, condoners, and promoters? Bet so. Its just a matter of time, I think.

Take care!

Larry "Wingnut" Wendlandt
MaStars - Mothers Against Stuff That Ain't Right
Bessemer MI USA

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