The Agenda

John Carney and Felix Salmon On Basel III

I haven’t been following the Basel III negotiations, but two of my favorite bloggers, Felix Salmon and John Carney, have written useful posts on the subject. Drawing on a news report in Die Zeit, Felix is cautiously optimistic: the capital requirements seem tougher than expected, and this is most likely good news. 

But John Carney has identified a potential problem:

A little noticed change in the proposed rules, however, could throw a monkey wrench into plans to reform Fannie and Freddie, the two mortgage giants that have spent the last two years on government life-support. So far, U.S. taxpayers have been forced to pony up around $150 billion for Fannie and Freddie, and the Congressional Budget Office says that the total cost could amount to three times that much.

Policy makers who hoped to eventually remove the costly government subsidies and guarantees for Fannie and Freddie will run into a stumbling block, however, if the Basel III rules are implemented. That’s because Basel III includes a liquidity requirement for banks that will encourage them to buy the debt of the Fannie and Freddie as well as the mortgage-backed securities they back.

In effect, John explains, this is a massive subsidy for the GSEs that will also dramatically increase their systemic centrality:

Banks will load up on GSE obligations, especially in an era where central bank reserves and Treasury bond yields are being depressed by policy-makers seeking to keep sputtering economies afloat. This artificial demand will scramble market signals about the risk taken on by Fannie and Freddie—all but ensuring that Fannie and Freddie will once again unwittingly take on more risk than they can handle. In short, the very same toxic situation created by the once implicit government subsidy of Fannie and Freddie is being baked right into Basel III.

Perhaps even more troubling, this will create a vicious cycle that will make reform of Fannie and Freddie next to impossible. Once banks have loaded up on Fannie and Freddie obligations, there will be no way for the U.S. government to remove government guarantees without triggering a liquidity crisis in banks around the world.

Possibly the most terrifying thing I’ve read in ages. John has followed up on how this limits the freedom of action of U.S. policymakers.

P.S. As my Economics 21 colleague Chris Papagianis observes, the negotiators are in a bind: had they not changed the rules, raising capital requirements would’ve been much tougher. So it’s possible that the U.S. has to decide to take action on the GSEs first, and then return to the negotiating table to revise the rules surrounding how GSE obligations are factored into capital requirements.

I’ll also add that I think I’m with Felix on the question of whether we need capital requirements. Of course, John is making a far more comprehensive case against the regulation of financial markets that is hard to evaluate, and I’m strongly disinclined to dismiss his arguments out of hand.

Most Popular

Elections

The Post-Election Madness Gets Worse

On the menu today: Two lawyers who aren’t formally on the president’s legal team but who keep filing lawsuits on his behalf tell Georgia Republicans to not vote in the Senate runoffs; Michael Flynn endorses a call for “limited martial law” and a “re-vote” of the presidential election; and the ... Read More
Elections

The Post-Election Madness Gets Worse

On the menu today: Two lawyers who aren’t formally on the president’s legal team but who keep filing lawsuits on his behalf tell Georgia Republicans to not vote in the Senate runoffs; Michael Flynn endorses a call for “limited martial law” and a “re-vote” of the presidential election; and the ... Read More
World

Trump Pulls American Troops Out of Somalia

President Trump on Friday ordered almost all American troops to be withdrawn from Somalia, following similar reductions in U.S. military presence in Afghanistan and Iraq. The Pentagon announced that the majority of the approximately 700 troops in Somalia will leave the area by January 15. Many are expected to ... Read More
World

Trump Pulls American Troops Out of Somalia

President Trump on Friday ordered almost all American troops to be withdrawn from Somalia, following similar reductions in U.S. military presence in Afghanistan and Iraq. The Pentagon announced that the majority of the approximately 700 troops in Somalia will leave the area by January 15. Many are expected to ... Read More
White House

Trump’s Disgraceful Endgame

President Trump said the other day that he’d leave office if he loses the vote of the Electoral College on December 14. This is not the kind of assurance presidents of the United States typically need to make, but it was noteworthy given Trump’s disgraceful conduct since losing his bid for reelection to ... Read More
White House

Trump’s Disgraceful Endgame

President Trump said the other day that he’d leave office if he loses the vote of the Electoral College on December 14. This is not the kind of assurance presidents of the United States typically need to make, but it was noteworthy given Trump’s disgraceful conduct since losing his bid for reelection to ... Read More

America Waits Out the Biden Era

Now that the post-electoral haze is clearing a little, and we see that the Democrats so skillfully arranged for massive ballot-harvesting electoral fraud in several swing states that their likely theft of the election may, in yet another demonstration of the atrophied condition of the American legal system, be ... Read More

America Waits Out the Biden Era

Now that the post-electoral haze is clearing a little, and we see that the Democrats so skillfully arranged for massive ballot-harvesting electoral fraud in several swing states that their likely theft of the election may, in yet another demonstration of the atrophied condition of the American legal system, be ... Read More
The Economy

Genuine Generosity

Because it tends to exaggerate our already excessive national sentimentality, the Christmas season is a time of sloppy thinking about several separate kinds of endeavor that are all lumped into the category of “generosity.” This year, the usual charitable impulses of the season inevitably will tend to bleed ... Read More
The Economy

Genuine Generosity

Because it tends to exaggerate our already excessive national sentimentality, the Christmas season is a time of sloppy thinking about several separate kinds of endeavor that are all lumped into the category of “generosity.” This year, the usual charitable impulses of the season inevitably will tend to bleed ... Read More