Ending Government Bailouts: As We Know Them (Hoover Institution Press Publication) - Hardcover

Brady, Nicholas F.; Duffie, Darrell

Hardcover

ISBN 10: 0817911243 ISBN 13: 9780817911249

Verlag: Hoover Institution Press,U.S., 2010

Inhaltsangabe

How Do We Make Failure Tolerable?

The American people are clearly upset about the massive government bailouts of faltering organizations and the consequent commitment of taxpayer dollars-as well as the heavy involvement of the federal government in private sector activities. How do we approach a problem of this magnitude? The key question, which George Shultz presents at the outset, is: How do we make failure tolerable? In other words, if clear and credible measures can be put into place that convince everybody that failure will be allowed, then the expectations of bailouts will recede and perhaps even disappear. Perhaps more important, we would also get rid of the risk-inducing behavior that even implicit government guarantees bring about. In Ending Government Bailouts as We Know Them, a team of expert contributors examine the dangers of continuing government bailouts and offer constructive alternatives designed to both resolve the current bailout problem and prevent future crises.

The other contributors follow up on Shultz's premise with discussions on a range of key topics. They begin with the nature of systemic risk-particularly in the experience of the Lehman Brothers bankruptcy-and the reforms that financial firms can implement, whether or not required by government regulatory agencies. They also explore in detail the two main alternatives to government bailouts in the case of a failing financial firm: bankruptcy versus resolution authority. The book concludes with a summary of the commentary on the chapters by formal discussants and the audience at the conference, ranging from constructive critiques to strong endorsements to ideas for future research.

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Über die Autorinnen und Autoren

Kenneth E. Scott is the Parsons Professor Emeritus of Law and Business at Stanford Law School and a Hoover Institution senior research fellow.

George P. Shultz is the Thomas W. and Susan B. Ford Distinguished Fellow at the Hoover Institution.

John B. Taylor is the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution and the Mary and Robert Raymond Professor of Economics at Stanford University.

Kenneth E. Scott is a senior research fellow and the Ralph M. Parsons Professor of Law and Business Emeritus at Stanford University Law School. He is an expert in public regulation of banking institutions, corporation law, and securities law. George P. Shultz is the Thomas W. and Susan B. Ford Distinguished Fellow at the Hoover Institution, and has had a distinguished career in government, in academia, and in business. John B. Taylor is the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution and the Mary and Robert Raymond Professor of Economics at Stanford University. He has served as the director of the Stanford Institute for Economic Policy Research and was founding director of Stanford's Introductory Economics Center.

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This book examines the dangers of continuing government bailouts and offers alternative strategies designed to “make failure tolerable” and eliminate the bailout mentality now and in the future.  The distinguished contributors show that it is possible to explain the causes of the crisis in understandable terms and clarify why resolving the bailout problem is essential to preventing future crises. Authors include:

George P. Shultz

Paul Volcker

Nicholas F. Brady

John B. Taylor

Kimberly Anne Summe

Darrell Duffie

Richard J. Herring

Joseph A. Grundfest

William F. Kroener III

Thomas M. Hoenig

Charles S. Morris

Kenneth Spong

Thomas H. Jackson

Kenneth E. Scott

Johannes Stroebel

With Commentary by Gary H. Stern, Monika Piazzesi, David Skeel, Peter J.Wallison and others.

Aus dem Klappentext

This book examines the dangers of continuing government bailouts and offers alternative strategies designed to “make failure tolerable” and eliminate the bailout mentality now and in the future.  The distinguished contributors show that it is possible to explain the causes of the crisis in understandable terms and clarify why resolving the bailout problem is essential to preventing future crises. Authors include:

George P. Shultz

Paul Volcker

Nicholas F. Brady

John B. Taylor

Kimberly Anne Summe

Darrell Duffie

Richard J. Herring

Joseph A. Grundfest

William F. Kroener III

Thomas M. Hoenig

Charles S. Morris

Kenneth Spong

Thomas H. Jackson

Kenneth E. Scott

Johannes Stroebel

With Commentary by Gary H. Stern, Monika Piazzesi, David Skeel, Peter J.Wallison and others.

Auszug. © Genehmigter Nachdruck. Alle Rechte vorbehalten.

Ending Government Bailouts as We Know Them

By Nicholas F. Brady, Darrell Duffie, Joseph Grundfest, Richard Herring, Thomas M. Hoenig, Thomas Jackson, William F. Kroener III, Charles S. Morris, Kenneth E. Scott, George P. Shultz, Kenneth Spong, Johannes Stroebel, Kimberly Anne Summe, John B. Taylor, Paul Volcker

Hoover Institution Press

Copyright © 2009 Board of Trustees of the Leland Stanford Junior University
All rights reserved.

ISBN: 978-0-8179-1124-9

Contents

Preface Kenneth E. Scott, George P. Shultz, and John B. Taylor, 
Acknowledgments, 
Part I: The Danger of Bailouts And Keyprinciples of Reform, 
1. Make Failure Tolerable George p. Shultz, 
2. Financial Reforms to End Government Bailouts as We Know Them Paul Volcker, 
3. Fifty Years in the Business: From Wall Street to the Treasury and Beyond Nicholas F. Brady, 
Part II: Systemic Risk in Theory and in Practice, 
4. Defining Systemic Risk Operationally John B. Taylor, 
5. Lessons Learned from the Lehman Bankruptcy Kimberly Anne Summe, 
Part III: What Financial Firms Can Do, 
6. A Contractual Approach to Restructuring Financial Institutions Darrell Duffie, 
7. Wind-down Plans as an Alternative to Bailouts: The Cross-Border Challenges Richard J. Herring, 
8. Wind-down Plans, Incomplete Contracting, and Renegotiation Risk: Lessons From Tiger Woods Joseph A. Grundfest, 
Part IV: Bankruptcy Versus Resolution Authority, 
9. Expanding FDIC-Style Resolution Authority William F. Kroener III, 
10. The Kansas City Plan Thomas M. Hoenig, Charles S. Morris, and Kenneth Spong, 
11. Chapter 11F: A Proposal for the Use of Bankruptcy to Resolve Financial Institutions Thomas H. Jackson, 
12. Evaluating Failure Resolution Plans Kenneth E. Scott, 
A Summary of the Commentary Johannes Stroebel, 
A Conversation about Key Conclusions George P. Shultz and John B. Taylor, 
Appendix: The Financial Crisis: Causes and Lessons Kenneth E. Scott, 
About the Authors, 
Index, 

CHAPTER 1

Make Failure Tolerable

George P. Shultz

These are tough times for the U.S. economy and for many others around the world. Tense moments in the last half of 2008 produced unprecedented actions that, according to recently published detailed accounts, were taken without the benefit of reflective strategy, on a case-by-case basis, and in an environment of panic. The result, especially in the United States, has been massive bailouts of faltering organizations with consequent commitment of huge amounts of taxpayer dollars and heavy involvement of the federal government through ownership in customarily private sector activities: selecting boards of directors and chief executives, regulating pay, and otherwise influencing corporate behavior. The American people are clearly upset about these bailouts. In the view of many, the people who created the problem should pay a penalty instead of being bailed out by the taxpayers. Who would disagree with that sentiment?

Difficult times are still with us and clearly lie ahead. Unemployment is high, the Fed has unleashed every trick in its bag (and even some that no one realized were in its bag) to stimulate the economy, government spending seems out of control, tax rates are rising with the clear prospect of more to come and with their well-documented disincentive effects, and protectionist actions are all too evident. Remember, the 1930s were characterized by the heavy tax of virulent protectionism and an increase in the top marginal income tax rate from 25 percent in 1932 to 80 percent by 1936.

WHAT TO DO?

The way to proceed is to set a strategy designed to produce growth based on the vigor of the private sector with inflation under control. One essential pillar of that strategy must deal with the current bailout mentality. The right question is, How do we make failure tolerable? If clear and credible measures can be put into place that convince everybody that failure will be allowed, then the expectations of bailouts will recede and perhaps even disappear. We would also get rid of the risk-inducing behavior that even implicit government guarantees bring about. "Heads, I win; tails, you lose" will always lead to excessive risk. And we would get rid of the unfair competitive advantage given to the "too big to fail" group by the implicit government guarantee behind their borrowing and other activities. At the same time, by being clear about what will happen and that failure can occur without risk to the system, we avoid the creation of a panic environment.

Here are a few ideas that can help make failure tolerable.

1. The first is to make a careful assessment of just what systemic risk means and how it comes about. In recent times, the words "systemic risk" have taken on the impact of a yell of "Fire!" in a crowded theater. Careful analysis is essential. My own experience with labor disputes thought to be national emergencies and a few other so-called failure situations tells me that the problem can be overestimated or can be reasonably contained. So, what are the size dimensions of the problem? Remember, markets can handle lots of size. What are the kinds of interconnections that cause trouble? Are certain kinds of activities so risky that they need to be reined in somehow? To what degree does excessive leverage create problems? Can capital requirements be structured in such a way that any risk is borne in important ways by the person deciding to take the risk? Are some activities too risky to permit financial organizations to use them for their own accounts?

2. How might intervention deal directly with the issues posed by a failure rather than by using a bailout to prevent the failure in the first place? Such action depends on the earlier analysis of what creates the risk. Then these questions arise: How can these risks be dealt with directly? What can be learned from other areas, such as the handling of major labor disputes, about how to handle systemic risk?

3. The phrase "too big to fail" implies some sort of restriction on size that would place an unnatural limit on reach and capacity. Actually, the difficulties of managing very large, disparate, and complex organizations tend to limit size. Competitors tend to cut them down. That is the history of conglomerates in the United States. Nevertheless, financial institutions present special problems because, by their nature, their activities can affect large sectors of the economy.

4. So, an escalating schedule could be required of necessary capital ratios geared to size and matched with escalating limits on leverage. The presumption here is that size happens because it brings advantages. Since size implies a certain risk to society, some additional costs would also be appropriate. Therefore, increased capital and leverage requirements are justified. Alternatively, or simultaneously, well-defined and compelling specific capital ratios and leverage limits could be related to the riskiness of the activity undertaken.

5. Understood and transparently used methods of delinking parts of large organizations could be developed so that if one goes haywire, the others can remain in business. Are you old enough to remember Christmas tree lights from long ago? When one light failed, they all went out. And the longer the string, the harder it was to find the guilty bulb and therefore the more time-consuming was the remedial action. Derivatives and securitization, so to speak, made the vulnerable string of lights even longer, increasing vulnerability and making the system more difficult to fix....

Details zur Ausgabe

• Verlag: Hoover Institution Press,U.S.
• Erscheinungsdatum: 2010
• Sprache: Englisch
• ISBN 10: 0817911243
• ISBN 13: 9780817911249
• Einband: Gebundene Ausgabe
• Anzahl der Seiten: 338
• Herausgeber: Scott Kenneth E., Shultz George P., Taylor John B.
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: Nicht verfügbar