Paul McCulley of Pimco, the world’s largest bond fund managers, has been continually insightful about the lead-up to the current Crisis and its fall-out. He first alerted the blog to the work of Hyman Minsky, which is the best (and so far only) explanation for the disaster that is continuing to hit the world financial system.
Helpfully, McCulley today also provides a simple yet powerful explanation of why re-regulation is essential for the banking system. He argues that no bank can operate without the support of a central bank, as a lender of last resort when times get tough. And he parallels this as follows:
When my son turned 18, he said, “Dad, I’m now the age of majority and I can do whatever I want.” I said, ‘Son, that’s absolutely true. However, I still control the Bank of Dad. And if you want to have access to the Bank of Dad, there are going to be rules. If you don’t want access to the Bank of Dad, that’s fine. But if you want access to the Bank of Dad, there are going to be rules.’
“The Federal Reserve and the FDIC and the Treasury, together, are the Bank of Dad. And Mom. I expect regulation to be similar to that which I have imposed on my son. It doesn’t mean I want to stifle his innovation. That doesn’t mean I want to stifle his creativity. I want him to be all he can be. But as long as he’s banking at Bank of Dad, there are going to be rules.”
Interestingly, Paul Volcker, who is now pushing through the Volcker Rule to re-regulate US banking, was in the audience.