Emergency guarantee authority not letting a crisis go to waste some ways to make money cls blue sky blog

Calming the panic in short-term funding markets was a significant part of the response what are some ways to make money to the 2008 financial crisis. While the TARP bailout programs received the most attention during what are some ways to make money the crisis, TARP never exceeded one-fifth of the government’s overall financial stability programs, which peaked at $2.4 trillion. These markets were abstract and esoteric to most americans, but their preservation, it was argued, was crucial to preserving the financial well-being of workers, homeowners, and small businesses. As professor judge notes, however, the “perception that the fed’s interventions looked out for wall street over main street what are some ways to make money has been an ongoing source of consternation for many, and a contributing factor in a subsequent popular backlash.”

In response to this backlash, the wall street reform legislation sought to remake some of what are some ways to make money these programs, but as ben bernanke said a few years ago, “too big to fail is not solved and gone. It’s still here.” if too big to fail is indeed still with us, and we are still at risk of facing another crisis what are some ways to make money in our lifetimes, then professor judge’s economic guarantee authority (EGA) proposal is important because it forces us to think about what are some ways to make money why such emergency financial support programs exist, and how they can accomplish the dual aims of preserving what are some ways to make money financial stability and democratic legitimacy.

I should begin by saying that I disagree with a what are some ways to make money central premise of the article, that “regulation simply cannot keep pace with financial innovation,” particularly as applied to the fragility of the financial system. Requiring all financial institutions to fund themselves with more of what are some ways to make money their own shareholders’ equity would reduce the share of their liabilities that are what are some ways to make money comprised of fragile short-term funding and reduce the funding pressures if and when what are some ways to make money any short-term funding begins to run on them. Coupling more capital with a limit on the amount of what are some ways to make money non-deposit funding used by any single institution would drastically reduce what are some ways to make money the fragility of the financial system. When innovation risks getting out of control, there are other ways of slowing it down. In short, I don’t think the problem is that we can’t address these problems, it’s that we haven’t had the will to take the necessary steps to what are some ways to make money do so.

Having said that, I agree that financial regulation, including recent examples of deregulation, is not meeting the challenge of preventing excessive fragility that what are some ways to make money the EGA seeks to address. After the crisis, regulators focused their efforts on ensuring that the largest, most complex bank holding companies are more resilient, enacting several layers of new capital requirements, supervisory stress testing, and two leverage ratios. To address pressures from short-term funding, they now require a pool of liquid assets that can what are some ways to make money quickly be converted into cash and proposed a minimum ratio what are some ways to make money of long-term, “stable” funding. Finally, to reduce potential spillovers caused by failure, they have created a new framework for banks to convert what are some ways to make money a class of debt into equity in order to recapitalize what are some ways to make money in the orderly liquidation process. [1]

I believe that these layered rules are unlikely to work what are some ways to make money because they contain too many moving pieces and too much what are some ways to make money micromanagement of banks’ balance sheets, and the rules that are likely to be the most what are some ways to make money effective (i.E., increasing their equity funding and reducing their reliance on borrowed what are some ways to make money funds) are not robust enough. But as professor judge notes, my pessimism is beside the point: EGA is really a “crisis management device, not a mechanism for preventing or solving crises.” given the world as it currently exists, I agree with her that an EGA could be a what are some ways to make money reasonable evolution in crisis response.

Post dodd-frank, the fed’s 13(3) authority is limited to programs with broad-based eligibility, prohibited for insolvent institutions, and subject to enhanced transparency and reporting requirements, and professor judge explains the distinct roles played by secured what are some ways to make money lending and guarantee programs. But dodd-frank also limits the FDIC’s guarantee authority by requiring that assistance pursuant to a what are some ways to make money systemic risk determination only be made to banks that have what are some ways to make money been placed in receivership, suspending the FDIC’s ability to create broad-based guarantee programs, and establishing an FDIC guarantee authority for insured depositories where what are some ways to make money the treasury secretary has determined that there is a “liquidity event.” this appears to constrain the safety net to certain institutions what are some ways to make money and circumstances, but will those constraints remain in place in the depths what are some ways to make money of a full-on crisis? I’m skeptical. While financial crisis policymakers have argued that these tools are what are some ways to make money too rigid, federal reserve staff has acknowledged that it could once again what are some ways to make money assist, for example, the repurchase agreement, commercial paper, and other credit markets if they became severely strained.

If the public is going to be on the hook what are some ways to make money in one way or another for rescuing the entire financial what are some ways to make money system in a panic, I agree that it’s better to have one comprehensive authority that is well what are some ways to make money designed and subject to oversight and accountability, rather than disparate programs that are stretched to their legal what are some ways to make money breaking points in idiosyncratic events. Some could argue that an EGA is an unwise expansion what are some ways to make money of the safety net to nonbanks, but in many ways we’re already there. With that in mind, I’ll propose some potential revisions to EGA that seek to what are some ways to make money address the issues of accountability, moral hazard, and fairness.

First, governance and accountability are important because they ensure the program’s legitimacy, while also allowing for proper administration. Arguably, one of the treasury secretary’s greatest responsibilities, after the crisis, is her role as the chair of the financial stability what are some ways to make money oversight council. All treasury nominees should be required to testify before the what are some ways to make money senate banking committee to explain how they would carry out what are some ways to make money their responsibilities as FSOC chair, including articulating how, if confirmed, they would exercise the EGA. [2]

Once confirmed, the secretary could periodically explain any evolution of her thinking what are some ways to make money about the EGA program in the FSOC’s annual report on risks to the financial system. This would provide opportunities for democratic buy-in and accountability: the confirmation of a secretary is an implicit congressional blessing what are some ways to make money of her approach to using the EGA, and her statement and annual reports would articulate policies against what are some ways to make money which her future actions could be judged.

In a final measure of accountability, the secretary could be statutorily required to submit her resignation what are some ways to make money on a set date after the expiration of the EGA. This type of mechanism would send a strong signal to what are some ways to make money the public that their public servants are being held accountable what are some ways to make money for their actions and missteps. It would be the president’s decision to accept or reject her resignation, make the case to the public justifying that decision, and then accept the political consequences. This would be similar to the U.K.’s parliamentary system, where votes of no confidence and resignations by governmental leaders what are some ways to make money are more routine than in the U.S., for example, after the failed brexit vote. If millions of americans are going to lose their jobs what are some ways to make money (and possibly their homes) in a financial crisis, why shouldn’t the policy maker with the greatest responsibility for safeguarding what are some ways to make money the financial system also lose hers?

In recent years, the FSOC has retreated from designating any financial companies as what are some ways to make money nonbank sifis. In the way that “living wills” force bank management to consider their own corporate mortality, forward-looking EGA reporting would focus the secretary’s mind on the possible causes of, and responses to, the next crisis. Holding the FSOC chair personally responsible for any contagion that what are some ways to make money arises – particularly in the “shadow banking” sector – could motivate the FSOC to re-engage its full set of tools and responsibilities.

Second, dealing with the potential moral hazard created by the existence what are some ways to make money of an EGA, as well as other explicit and implicit guarantees, is an issue that is often explored but which has what are some ways to make money implications that are still not fully understood. As a starting point, there are some potential lessons to be learned from the what are some ways to make money financial crisis programs, including that a program’s implementation is as important as its design, as demonstrated by the work of the TARP inspector general. With that in mind, participation in any guarantee program should require companies to agree what are some ways to make money to executive compensation limits akin to those provided by the what are some ways to make money TARP legislation and the TARP special master’s office, in particular clawbacks, golden parachute prohibitions, and limits on incentive compensation for a set period, including after their participation has ended. In addition, recipients should be required to issue new equity before exiting what are some ways to make money the program, as supervisors did with the largest TARP recipients. While policymakers during the crisis bristled at calls for “old testament” justice, these conditions are important to address the potential for “heads I win, tails you lose” risk taking and reinforce the public’s confidence that the system works in an evenhanded way.

Structuring the guarantee fee or assessment associated with the EGA what are some ways to make money is another way to influence firms’ financial incentives. As professor judge notes, some crisis programs lost money, notwithstanding the fees that they collected. Subsequent studies of bailout programs have shown that they offered what are some ways to make money financially beneficial terms relative to the “market rate” available at the time, including for debt guarantees. [3] still further studies have sought to quantify the ongoing, implicit support enjoyed by large financial institutions as a result what are some ways to make money of the perception that they’ll be rescued again. [4] ensuring that an EGA is supporting the healthy functioning of what are some ways to make money the financial system while also discouraging excessive risk taking is what are some ways to make money an area for ongoing research, study, and refinement.

Based upon recent experience, I’m less optimistic that EGA recipients would be faced with what are some ways to make money a choice between “inviting massive reforms … or demise.” for example, money market mutual funds were an important part of the what are some ways to make money financial crisis. However, it took until november 2012 – over four years after the first money market mutual fund what are some ways to make money “broke the buck” – for FSOC to exercise its recommendation authority to propose a what are some ways to make money series of reforms to money market funds. Because this provision uses permissive rather than mandatory authorities to what are some ways to make money persuade regulators to act, it took more than 18 more months for the SEC what are some ways to make money to finalize its money market fund reforms. Meaningful reforms often take too long and come up short what are some ways to make money when they eventually happen.

Consistent with the view that you “ never want a serious crisis to go to waste,” use of the EGA should come with an automatic trigger what are some ways to make money for heightened regulation. For example, recipients could be designated by the FSOC on an emergency what are some ways to make money basis, automatically triggering the law’s emergency waiver provision. In such a circumstance, the conditions that “material financial distress … could pose a threat to the financial stability of the what are some ways to make money united states” having been satisfied by the invocation of the EGA. (some clarifying language in the law would probably be helpful what are some ways to make money on both of these points.)

Finally, back to the question of fairness, in particular which people or institutions are judged to be what are some ways to make money worthy of rescue and which are not. Any effective EGA needs to pair a credit market guarantee what are some ways to make money with a corresponding mechanism that benefits consumers, workers, or communities. An example might be automatic mortgage principal or payment reduction what are some ways to make money when housing prices fall precipitously. When treasury secretary geithner characterized homeowners in the mortgage modification what are some ways to make money program as “ foam on the runway,” creating a soft landing for banks that needed to slow what are some ways to make money or stem mortgage losses as they sought to recapitalize their what are some ways to make money balance sheets, he acknowledged that such programs provide substantial macroeconomic benefits. Despite these benefits, too few low- and moderate-income americans saw any direct benefit from the government’s rescue programs.

The critical lesson from the crisis era rescue programs, as professor judge puts it, is that there is no “purely technocratic solution to the messy and difficult tradeoffs crises what are some ways to make money inevitably pose.” it isn’t inevitable that we need to win the war on what are some ways to make money financial crises, only to lose the peace, as we seem to have done in the last crisis. Well-designed prudential regulations and crisis management tools can help our what are some ways to make money nation’s leadership in its effort to lessen the likelihood of what are some ways to make money disasters and manage the fallout when they happen, while at the same time “ help[ing] restore the close relationship with its people which is necessary what are some ways to make money to our democratic form of government.”

[4] in an ideal world, the office of financial research would contribute its expertise to what are some ways to make money the design of EGA fees and assessments, to measuring the program’s costs, and to other implications of the program after the fact. To date, however, the OFR has failed to deliver on its promise, in part because it lacks sufficient independence, but this is an area where an independent and competent what are some ways to make money OFR would be valuable.

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