Tyler Cowen: evaluation

Transcript context

…Yes. Look, that’s the very essence of financial stability. The conundrum of financial stability that we face as a society and as central banks around the world are exactly this — that there is an official banking sector that we have oversight of. Then there’s a shadow banking sector, which is getting bigger and bigger every year and can be prone to runs, and that runs. What is the role of a central bank as a lender of last resort in an environment where it doesn’t play? By trying to keep banks special, haven’t we created a world where 80 percent of the lending is outside banks, which is much harder for the Fed to deal with, even if you should sometimes step in, and that at the current margin, it’s counterproductive to keep banks legally special because we drive more and more business out of banks. That was two different statements. One is, how is that a problem? The second was the normative — isn’t it useless, and so we shouldn’t do it? Jeremy Stein is an old friend, and I’m a massive admirer of his work. When he was a governor at the Fed, he highlighted exactly this, that we have to strike a balance in financial stability. If you squeeze really, really hard on one side, there can be regulatory arbitrage, and it can lead to activity to shift to the area where we don’t control, and oftentimes, don’t even have the information. I agree with you on that part. I don’t know if I would go so far as your second statement, that therefore it’s counterproductive oversight. Raising capital ratios on official banks is not effective because it leads to shadow banks. Very early, I arrived at the Fed, and then the Silicon Valley Bank events happened. I was there back in 2009 when the big banks were the centerpiece of the problem. The fact that in March of ’23, the big banks were not the problem, I think a lot has to do with all of the efforts that were put in place to raise capital at those larger banks. We can argue about whether it was done right, but you’ve got to admit it, it made you feel better that it wasn’t the biggest official banks that were facing critical deficiencies in capital.…

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