Saturday, August 5, 2017

WOW The Federal Reserve Smacks Down Paul Krugman

In a recent column, The New York Times economist Paul Krugman attacked the deregulation of banking and called banking before deregulation "boring banking."

He blamed the crises since the deregulation as being caused by the deregulation.

But none other than the Federal Reserve has come out to refute Krugman's claim. In an essay, Were Banks ‘Boring’ before the Repeal of Glass-Steagall?, Nicola Cetorelli, an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group, concludes:
In sum, the repeal of Glass-Steagall in 1999 does not seem to have ignited a flurry of new activities. As I note in a recent New York Fed Staff Report(see page five), banking firms had already been widening their business scope for a long time, so it is not clear that that particular regulatory reform can be considered the catalyst of the Great Recession some ten years later, nor is it immediately obvious how reinstating restrictions per se would reduce the likelihood of a future crisis.


  1. But the repeal of one act while congress is creating more isn't deregulation or even less regulation it's different regulation. All the regulation wasn't repealed. Some was repealed and more was added. The mix changed. That's all.

    1. That's quite true. Krugman and others like him want to portray the repeal of Glass-Steagall as a return to the Wild West or something akin to a Mad Max dystopia but are quick to overlook the slew of new regulations coming from a Congress too willing to "do something."

  2. It's been about a decade since the term "mortgage arbitrage" made headlines. It's back.

    In the clearest sign yet of just how late far the investing cycle the developed world finds itself, the FT writes that wealthy British homeowners are again borrowing against their property to invest in bonds, equities, alternative investments or commercial property as the low cost of debt creates opportunities for “mortgage arbitrage”. And while taking out a mortgage to invest in "safer" arbs like corporate bonds, commercial real estate or private equity would be at least understandable, if not excusable, in the current low-yield regime, some more extreme "investment" decisions suggest that the madness and euphoria that marked the peak of the last asset bubble is back: because while growing numbers are prepared to risk using their primary residence as collateral, some are ready to gamble on extremely volatile assets like bitcoin, wine and cars.

    One broker said a mortgage-free homeowner with a house valued at £10m had taken out a fixed-rate loan of just under £2m to buy bitcoin, the crypto currency that has seen huge volatility in recent months. Others have invested in classic cars or fine wine. One former banker took out a £500,000 mortgage, not for investment purposes, but to provide a fund for routine spending and other eventualities.

    Wealthy borrowers use home loans to bet on stock market
    One homeowner uses a £2m mortgage to bet on bitcoin