“fallacies, irrelevant facts and myths”

Before anyone ever discusses the subject again, or listens to another banker bellyaching about how increased capital requirements will slow down economic growth and hurt everybody, he or she must read the scholarly study by an international group of researchers entitled “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive” (hat tip Felix Salmon). The study is Working Paper No. 86 of the Rock Center for Corporate Governance at Stanford University, and it is based on science, not self-serving argumentation.

The working paper completely debunks the range of arguments mounted against increasing capital requirements, from how increased capital would prevent banks from operating at optimal scale to how such increased requirements would lead banks to reduce lending. Wherever one of these arguments might have some merit from the narrow point of view of the protagonist, the authors go on to demonstrate why the supposed “benefit” is nevertheless detrimental from a public policy perspective. (For a convenient cheat sheet, see page 52.)

How timely: just as the Basel Committee begins to wrap up its proposals for heightened capital requirements in the face of bank opposition. As one who is strongly in favor of tougher capital requirements, Felix Salmon is currently moderately optimistic. Having been burned once already, I am less so!

3 comments for ““fallacies, irrelevant facts and myths”

  1. September 7, 2010 at 11:26 pm

    Professor Baxter,
    I am guessing as an academic man, you would frown on people bringing religion into this topic. But I must say again, this site will rise to the top of the ranks of blogs if you continue this, what, I personally view as God’s work. Really I mean that, and I don’t see myself as pious. We have to stand for something, if we don’t stand for something we stand for nothing.

    Although generally I like Felix Salmon, I stand together with you in the pessimistic camp. Basel will achieve nothing because it is not the officials making decisions here, but Basel is the Official’s in big bankers’ back pocket. END of story. But am guessing as a good man, your feeling is the same as mine, in that you are wishing, and would be very happy, if Felix Salmon was correct in his moderate optimism, and we were wrong in our pessimism. I know I wish my pessimism as far as big banks’ control of our nation and big banks’ control in Basel policy making, was in fact wrong.

    How can we fight against the Diotrephes-like characters like Glenn Beck in a semi-illiterate nation???? I don’t know…….

  2. September 8, 2010 at 1:21 am

    I bet this link or embed won’t work I have to try. Hey President Obama, Choose Elizabeth Warren. Put your head own and run for daylight. Run and don’t stop.

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