Institute for Financial Transparency

Shining a light on the opaque corners of finance


Cochrane Responds to Yellen’s Jackson Hole Speech

Periodically, I stumble across a post that I recommend reading.  John Cochrane’s response to Janet Yellen’s Jackson Hole speech is one of these posts.

He understands she is playing around in the regulatory weeds and making any number of claims that cannot be confirmed or denied.

For example, she claims the financial system is safer.  She bases this claim on the observation banks have more capital.

He questions is this really true.  Regular readers know this is at best a 50/50 proposition.  After all, regulators haven’t reinstated mark to market accounting nor have they ended the policy of “extend and pretend” adopted when the crisis started.  So there are real question about what losses are still hiding on bank balance sheets.  These hidden losses result in bank capital being overstated.

He doesn’t question whether banks having more capital makes the system safer or less prone to a taxpayer funded bailout when the next crisis hits.

This is unfortunate.  Regular readers know bank regulators will never make banks recognize losses when a crisis hits.


Bank regulators fear banks recognizing losses will increase panic in the financial system.

So by itself, banks holding more capital does not make the financial system safer or less prone to a taxpayer funded bailout when the next crisis hits.

Of course, the regulators’ fear is a non-issue if banks provided transparency.  Then the market would know what losses the banks have and it would exert discipline to be sure the losses are recognized.

As you read the rest of his post, please keep in mind the Information Matrix.  Financial crises occur in the blind betting quadrant.  As a result, ask yourself if any of the actions the Fed has taken do anything to effect this quadrant (hint: no).