The Bank of Japan Creates a State-Led Monopolistic Banking System

by Taiki Murai and Gunther Schnabl[*]

In the second half of the 1980s, 13 Japanese city banks climbed into the group of the world’s largest banks, boosted by a domestic speculation boom. With the bursting of the Japanese financial “bubble” in the early 1990s, a gradual decline followed. Since then, the Japanese city banks have been driven by Japanese monetary policy into a concentration process, which has produced new giants without increasing efficiency. Continue reading

Where is the Bubble?

by Jerry O’Driscoll  

The monetary analysis of the housing bubble focuses on the impact of low – even negative – real rates of interest on housing demand.  That theory suggests the Fed must be inflating new bubbles with its continued policy of a near-zero federal funds rate. Skeptics ask where are the bubbles?

In today’s Wall Street Journal Business World column, Holman Jenkins answers with “Plane Crazy.” He specifically points to the recently announced deal in which debt-burdened and unprofitable American Airlines will take delivery of 460 new planes.  How did American pull this off?

Boeing and Airbus will share the order and each will finance a substantial portion of the purchase. “Think about it this way: Two rival banks get together and offer you a ‘no-doc’ mortgage for 115% of the value of your home,” writes Jenkins. He characterizes this as an opportunity for a “go-for-broke shot at a turnaround” for American. It’s an offer the airline could not refuse.

There are an ample number of other candidates for a bubble: gold, oil, farmland in the Midwest and perhaps the S&P. The entire world is awash in cheap dollars and much of the impact of the Fed’s policy has been to inflate bubbles overseas. That can be seen directly with the AA deal. More than half the order is going to Airbus, a European company.

The Fed’s easy-money policy was supposed to stimulate the U.S. economy and produce jobs for Americans. Fed policy has produced prosperity and jobs, just not in the United States.

Summer Reading III

by Jerry O’Driscoll

According to Reinhart and Rogoff, “for the advanced economies during 1800-2008, the picture that emerges is one of serial banking crises.” In This Time is Different, the authors bring us up to the present by examining the history of banking crises. Banking crises are not only frequent , but often accompanied by other kind of crises.  These include exchange rate crises, domestic and foreign debt crises and inflation crises.  The current financial crisis is still unfolding, but we have already seen the clustering of crises.

They observe that banking crises are often preceded by surges in capital flows.  This finding may be controversial, but they detail it at length.

Banking crises are often associated with an asset bubble in housing. They compare the current housing and banking crises to others stretching back to one in Norway during 1898-1905. They devote considerable time to inflationary crises, which are quite common aftermaths both in earlier and more recent history (1500-1799 and 1800-2008).

That brings them to the subprime meltdown and what they term “the Second Great Contraction” (after the great Contraction, 1929-33).  It is an excellent and thorough presentation. They note historical studies calling into question the Fed’s policy of “benign neglect” toward the housing bubble under Greenspan and Bernanke.

The history of the aftermath of banking crises is sobering.  One salient fact: in the aftermath of 21 banking crises involving a housing boom and bust, real housing prices declined on average 35.5% over 6 years. By that record, we are but halfway through the housing bust. They find that “for banking crises, real housing prices are nearly at the top of the list of reliable indicators” (p. 279).  Once again, the Fed’s attitude toward the boom in housing prices is called into question by historical experience.

I recommend this book to all for serious summer reading.

Bleeding the Economy

by Roger Koppl

At the Cobden Centre‘s website (and here), Steve Baker discusses recent Fed signals in the context of Big Players theory.  The more active the Fed (or other central bank), the greater the fraction of entrepreneurial attention devoted to Fed watching rather than productive activity.  As Baker says, “traders must pay attention to the Big Player and not the fundamentals.” Continue reading

A Sad, Sorry Song

by Thomas McQuade

In looking back over the many excellent posts and comments that have graced ThinkMarkets in its first year, I was struck by the fact that, while many of the literary virtues have been displayed, there has been – surprisingly – nothing that could pass as poetry.  I hope to be forgiven the presumption of attempting to rectify that omission with the following submission, vile doggerel though it may be.

I have a tale to tell, O!  (A sad, sorry tale, O!) …
It is told in the hope there’s no slipp’ry slope
And that prudence can prevail, O!
Tells the cause of a crisis, cruelly cast
Hitting hard-won savings, thought amassed.
It involves good intentions gone astray,
And the misplaced myth that some experts may
By their brains and their brilliance brave the way
To ensure economic ease, O! Continue reading

Retrospect Is Prospect?

by Mario Rizzo  

In the course of doing some research about the late economist Charles Kindelberger I came across an obituary article in The Economist dated July 17, 2003. The article made reference to the question whether the Fed’s policies after the then-recent dot com bubble simply saved us from recession or laid the ground for worse to come. It is interesting to read something like this when the current news looks like a replay.  

Economists are split over the recent performance of America’s lender of last resort, the Federal Reserve. Some argue that its policy of easy credit inflated the bubble, although nobody can be certain what effect tighter money would have had once the bubble began to expand. Some economists believe that the Fed’s interest-rate cuts since the bubble burst have been a triumph, preventing a severe recession. Others think that the Fed has merely postponed the day of reckoning.

I am sure there are many other articles out there from this period asking the same question. Have any readers found them?

Regulatory War of Choice

by Chidem Kurdas

“A just war” is how Treasury Secretary Timothy Geithner describes the movement to expand financial regulation.  “It’s a war of necessity, not a war of choice,” he  is reported as saying about  the battle to impose greater government control on the financial sector.

This is the man who presided over the New York Federal Reserve Bank as the Fed assiduously provided the monetary fuel for the over-expansion of credit and the associated property bubble. The eventual implosion  of the twin bubbles caused the financial crisis of 2008.

For sure, markets are prone to ups and downs, because people are prone to behaviors like herding. And yes, bankers drank the spiked punch, as did myriad others from mortgage originators and real estate developers to over-extended households. But the Fed provided the heady stuff, thereby creating a boom-and-bust cycle of extraordinary magnitude.

Now, does Mr. Geithner’s proposed regulations seek to prevent similar nefarious policies in the future by limiting the Fed’s discretionary powers? Of course not. Silly even to ask. His quest is to expand the authority of government agencies, not to regulate them.

The one attempt to get a sense of what the Fed is up to, a bill by Congressman Ron Paul, has been destroyed at a Congressional sub-committee—even though it had 308 co-sponsors. Continue reading

Some Thoughts on Efficient Markets

by Mario Rizzo  

The New York Times had a very interesting article recently on the demise of the efficient markets hypothesis. The proximate cause of this demise is the failure of the hypothesis to explain the recent financial meltdown. It has been standard for Austrians to say – not just recently but over many years – that the hypothesis could not be strictly correct.  At the very least, Austrians would supplement it with a theory of arbitrageurs who take advantage of asset-pricing inefficiencies and move markets toward greater efficiency.  

Furthermore, there are issues about just what an efficient asset market is. What does it mean for all “available” information to be taken into account in asset prices? Available to whom? Information interpreted by whom? The matter of interpretation gives rise to the question of whether there is only one correct model of efficient information use. Today’s information must be used to predict future returns. They may be more than one scenario consistent with the efficient use of today’s information.  Continue reading

Rewarding the Punch Provider

by Chidem Kurdas


After causing a debacle by flooding the system with oodles of easy money, the Federal Reserve is to morph into the enforcer of  systemic prudence. We’re told that Treasury secretary Tim Geithner wants to create a single systemic risk regulator to oversee the whole financial system and the Fed will probably get the job.


Current conventional wisdom holds former chairman Alan Greenspan responsible for the Fed’s mistakes— such as keeping interest exceptionally low in 2002-2006 and not tamping down on excessive lending by banks. That staved off the recession in the aftermath of the stock market collapse, but created the twin credit-property bubbles and the current mess.

Continue reading