In an earlier post, Even with MMT, Economics still struggles with financial crises, I managed to convey much more disagreement with the advocates of MMT about how to reform the banks than actually exists.

For example, both of us agree there is no way for a depositor or investor to assess the risk of the banks, particularly the current batch of government designated Too Big to Fail banks.  Warren Mosler phrased this as:

The hard lesson of banking history is that the liability side of banking is not the place for market discipline.

But this is really equivalent to the 100 best buy-side analysts have no clue how risky each bank is and therefore investors’ decisions don’t reflect risk or result in market discipline.  A position I am in complete agreement with.

For example, both of us agree on the need for transparency into each bank’s current exposure details.  He achieves this by changing how the Fed lends to banks.

Currently the Fed will only loan to its banks on a fully collateralized basis. However, this is both redundant and disruptive. The Fed demanding collateral when it lends is redundant because all bank assets are already fully regulated by Federal regulators. It is the job of the regulators to make sure that all FDIC insured deposits are ‘safe’ and ‘taxpayer money’ is not at risk from losses that exceed the available private capital. Therefore, the FDIC has already determined that funds loaned by the Fed to a bank can only be invested in ‘legal’ assets and that the bank is adequately capitalized as required by law.

This change makes the regulators responsible for not only having access to the exposure details, but also reviewing these details for compliance with regulations.

My approach is to have the current exposure details disclosed to all market participants. By increasing who gets disclosure, I put the market in a position where it can exert discipline on the regulators to do their job.

As I said at the start of this post, our differences when it comes to reforming the banking system tend to be greatly exaggerated (even when I am the one doing so….).