Is the New York Fed Making a Big Mistake? - Simon Johnson/NYT [View All]

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Is the New York Fed Making a Big Mistake?
By SIMON JOHNSON
Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”
March 3, 2011, 5:00 AM

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An uncomfortable dissonance is beginning to develop within the Federal Reserve. On the one hand, current and former senior officials now generally agree with the proposition that our leading banks need more capital – that is, more equity relative to what they borrow. (The argument for this has been made most forcefully by Prof. Anat Admati and her distinguished colleagues.)

The language these officials use is vaguer than would be ideal, and they refuse to be drawn out on the precise numbers they have in mind. The Swiss National Bank, holding out for 19 percent capital, and the Bank of England, pushing for at least 20 percent capital, seem to be further ahead and much more confident of their case on this issue.

But an important split appears to be emerging within the Federal Reserve, with the Board of Governors (perhaps) and some regional Feds (definitely) tending to want higher capital levels, while the New York Fed is – incredibly – working hard to enable big banks actually to reduce their capital ratios (in the first instance by allowing them to pay increased dividends).

Officials at the New York Fed with whom I and others have spoken appear to be hardening their position against requiring big banks to maintain more capital (beyond the insufficient increases in the Basel III agreement), though no formal position has yet been taken. These officials will not speak on the record nor provide any details about their arguments or whatever evidence they have developed to support them.

So it is hard to know if any analytical basis exists for their evolving position. They have certainly put up no meaningful counterarguments to the powerful points made by Professor Admati and her colleagues – both in general and against allowing United States banks to increase their dividends now (see also this letter published in The Financial Times).

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More: http://economix.blogs.nytimes.com/2011/03/03/is-the-new-york-fed-making-a-big-mistake/?partner=rss&emc=rss

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