24 September 2014

Rent Seeking in Action. Or, A Reason Markets Fail

Go here (behind paywall) to read an article in the Wall Street Journal about how Senator Chuck Schumer (D-NY) is putting pressure on the Federal Reserve to change a rule designed to reduce bank collapses like those faced in 2008.

To its credit, the Fed is requiring banks to maintain a larger portion of their investments in highly liquid assets so they will be able to withstand a run by depositors. Given the bankruptcies of cities like Stockton and Detroit, and the underfunded pensions of many cities and states, one might think a rule eliminating bonds issued by municipalities from the category of such liquid assets was a good idea. Unless you're Senator Schumer. He's pressing for the Fed to permit bonds issued by municipalities, no matter how risky they may be, to count as "gold" for banks. I'm sure this has nothing to do with the gargantuan need of New York City for access to the credit markets.

I addressed a number of political (mis)calculations that have lead to the financial straits of many American cities in Municipal Bankruptcy: When Doing Less Is Doing Best (download here) but those machinations were at the state and local levels, not the Congressional. But I should have known better: Leave it to our elected leaders to create risk at the expense of others.

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