If corporate tax cuts raise GDP by 30%, and the rate of return is 10%, this means cumulative current account deficits of 30% of GDP over the adjustment period. Say we’re talking about a decade: then we’re talking about adding an average of 3% of GDP to the trade deficit each year — around $600 billion a year, doubling the current deficit.
.. Second, all that foreign capital will earn a return — foreigners aren’t investing in America for their health. As I’ve tried to point out, this probably means that most of any gain in GDP accrues to foreigners, not U.S. national income.
.. they’re peddling an analysis that implicitly predicts huge trade deficits and a large jump in income payments to foreigners, they’re using a model that has no way to assess these effects or take them into account.
Since 2008, U.S. banks have raised roughly $500 billion in new shareholder capital, bringing the total to $1.7 trillion. The added capital provides a larger cushion against losses (and, of course, the new shareholders enjoy any profits).
.. In addition to more capital, banks also have a more stable base of funds used for lending. According to Geithner, deposits now represent 86 percent of U.S. banks’ liabilities, up from 72 percent in 2008. Deposits tend to be stable, because most are insured by the government (up to $250,000 by the Federal Deposit Insurance Corp.) During the crisis, the flight of uninsured short-term funds (so-called repurchase agreements and commercial paper) threatened the entire financial system.
.. Despite this, Dodd-Frank has crippled government’s ability to defuse future financial crises. It has restricted government’s “ability to act as a lender of last resort.” The Fed’s power to lend to individual institutions is curtailed, making it harder to nip future crises in the bud. The Fed can’t act until many institutions are in trouble. Consequently, we are “even less prepared to deal with a crisis” than in 2007.
.. The real Dodd-Frank scandal is that this misinterpretation of events, widely embraced by both parties, has been allowed to stand. In many bailouts, banks’ shareholders suffered huge losses or were wiped out; similarly, top managers lost their jobs. The point was not to protect them but to prevent a collapse of the financial system.
If the Trump administration doesn’t repudiate the conventional wisdom and change the law accordingly, it risks creating a future, self-inflicted wound.
What gets lost in the discussion is that Dodd-Frank, properly executed, would help to create the conditions for breaking up large and complex banks. That’s because the banks would face rising regulatory costs, which means they might well be worth more to investors if taken apart.
.. Even so, the capital requirements are not strong enough, in part because they do not require banks to fully account for potential losses from the trading of derivatives, a multitrillion-dollar activity.
Recent data provided by the banks to the Federal Reserve show that capital at big American banks recently averaged a healthy 13 percent of assets. But if derivatives and other holdings were fully included — as is required under international accounting rules but not under American ones — capital would come to a feeble 5.7 percent.
But applying the leverage ratio may reveal a yawning hole at European banks, according to an analysis by Sascha Steffen, an associate professor at ESMT European School of Management and Technology in Berlin, and Viral V. Acharya, a professor of economics at New York University. They first assumed European banks had to write off all the nonperforming loans that are not covered by reserves. Then they calculated how much equity capital the banks would then need so that their equity capital equaled 4 percent of total assets. In that situation, the banks in the sample would have a theoretical capital shortfall of nearly $350 billion.