Question

Summarize all of the arguments from Anat Admati, Edward Kane, and Kevin Dowd.

Answer 1

Anat Admati

As per Anat, "the policymakers who repeatedly fail to protect the public are not accountable, partly because false claims obscure reality, create confusion, and muddle the debate". Admati recently mentioned four myths that contribute to what she calls “wilful blindness” on the part of politicians, regulators, and others and explained why it is essential to educate the public on the issues.

Myth 1: Financial crises are like natural disasters — they will inevitably occur at some point, and they are impossible to predict or prevent: If financial crisis is both unpredictable and unpreventable then proper measures should be taken to minimize the harm when a crisis occurs. Effectively designed measures to ensure that financial system is safer can actually improve the way it functions without sacrificing any of its benefits. As per her you always get danger signs in advance, so even if they can be avoided atleast their impact can be minimized.

Myth 2: Problems in banking are just about flaws in the plumbing of the system.: As per Admati, liquidity problems are more likely to happen when investors fear what they do not know about the value of financial securities, and when too much risk is taken with debt funding and losses start to mount. A quick fix like “liquidity support” from central banks only diverts attention from the root causes of those problems and not solve the opaqueness of the system.

Myth 3: Stricter banking regulations have “unintended consequences” as financial services move from regulated banks to an unregulated “shadow banking system.”: She states that regulations fail because financial institutions regulations are poorly designed and poorly enforced. We should not avoid regulation, but we should try to close tax loopholes rather than giving up on tax collection. It was the failure to enforce effective regulations 10 years ago that led to ‘unintended consequence’ of a worst financial crisis.

Myth 4: Regulations always come at a cost because they constrain what corporations can do and interfere with the efficiency of free markets: One of the distortions here is that banks don't want to have high equity to finance their investments whereas other companies don't have an option in actual markets, they have to have high equity. If the government subsidizes banks’ excessive borrowing, through explicit and implicit guarantees and tax subsidies, it is doing nothing but feeding them on debt addiction. One solution she sees here to solve this issue is that banks use much more equity funding.

Admati warns that if we only show anger with big banks or the “rigged system,” without understanding the root cause it wont be sufficient to solve the financial problems.

Edward Kane

While reviewing "The Gathering Crisis in Federal Deposit Insurance" , the study by Edward Kane warns bankers, regulators, politicians, and taxpayers that no matter how successfully the deposit-insurance system was running the past, eventually it will lead to an expensive bureaucratic breakdown. It argues that unless market discipline can be reintroduced, this breakdown threatens to take depository institutions into de facto nationalization.

Further in his study of reviewing the Explicit Deposit Insurance, which is widely considered to be a crucial element of modern financial safety nets, he challenges the wisdom of encouraging countries to adopt DI without first repairing observable weaknesses in their institutional environment.

In one of Kane's writings, he further states that Hidden Subsidies for Too Big to Fail Banks. With this he shares the thoughts of Admati while she discusses the Myth-4.

In Kane’s key contributions, he uses market data to assess the value of the hidden subsidies that nation states and their central banks provide to their megabanks. Basically what happens is that Investors pay more for the stocks and bonds of banks that they strongly believe are Too Big to Fail—and the premium investors are willing to pay will be especially evident in the bond market. Kane shows this by comparing surges in the probability of default at TBTF banks with the highly muted changes that occur in the size of their observable interest-rate spread over Treasury securities of the same maturity—implying that bond holders are not that fearful they will take losses. This leads to delay in cleaning up bad loans and other detritus left over from the financial crisis. It is a quick fix but not a long term solution to the economy.

Kevin Dowd

As per Kevin, "The regulations in NY regarding BitLicense are a kiss of death". He fiercely advocate private money over government-issued and controlled alternatives. By private money he means money that is privately issued unregulated (or loosely regulated) currency, NOT money issued by a non-governmental entity. He advocates that Freedom from regulation and government control is much more important. Private money he says has profound implications, it has the potential to transform the relationship between the state and the individual: money would be liberated to open competition, and the ability of the state to abuse our money would be eliminated, or least greatly reduced. He further states that once the government gets us in its snare in such matters, there is no escape. In this sense, Bitcoin going mainstream (i.e., in the regulatory sense) kills the whole point of it, not least as there are more efficient payment systems available depending on where you are.

Dowd's main subject of research is private money and free banking. He believes that monetary and financial systems should operate without any government intervention and in the absence of any central bank. A related focus of his work is on central banking and other forms of state intervention into economies, most particularly, on deposit insurance, the lender of last resort and bank capital adequacy regulation. He has repeatedly called for the abolition of central banks and an end to state intervention in the financial system.

Dowd has also written extensively on financial risk measurement and management. He has argued that most financial modelling is conceptually invalid because it is based on a naïve ‘scientistic’ belief that economic systems can be modelled using quantitative methods inappropriately imported from natural sciences such as physics. He is particularly critical of the widely used Value-at-Riskor VaR risk measure, the assumptions inherent to, and so the use of the "normal" or Gaussian distribution in risk management, and the use of financial risk models for regulatory purposes.