Robert F. Engle Quotes
A lot of ambitious code has been written into the law for those and we will have to see if it actually works, if we have another example of a big financial institution going bankrupt.
Engle, Robert F. Interview. Big Think, Freethink Media, 2010.
He was referring to Fannie Mae, the government-created. private mortage guarantee company. It was heavily regulated, and in general it met the regulatory requirements. However, the requirements were insufficient, and in the 2008 Meltdown and the Great Recession that followed, Fannie Mae itself was in such bad financial condition, that the Federal Government had bail them out or have the entire home mortgage industry fall apart.
The Dodd Frank bill was designed, in the aftermath of the large bank induced meltdown of 2008 and the Great Recession, to regulate the banking industry so that no bank would be “too big to fail”. However, although the bill placed many restrictions on the banks to prevent much of their risky economic behavior, which the banks complained inhibited their growth and profitability. However, the bill did not put any limits on the size of the large banks and their critical proportion of the U. S. Financial System. If a bank was large enough, the government did not dare allow the bank to fail regardless of how profligate the Bank had been with its depositors’ money. So the shareholders made big money from the Bank’s risky behavior if it turned out well, and if not the taxpayers had to bail the banks out, because they were too big to fail without causing much of the rest of the country to also fail. Warren and others wanted a simple solution. Break up the large banks into smaller ones and then if any one of the small units makes poor investments, the bank could fail and other than its shareholders and creditors, the effect would not be so serious that the government could not allow the bank to go into bankruptcy. Mismanaged banks could fail like other mismanaged companies and not take down much or the rest of the country with them. But the banks lobbied to prevent that, and by 2014, 6 years after the taxpayers had to bail out banks that were too big to fail, many of the banks were twice as large as they were when they were already too big to fail.
Banks often lie. The system encourages them to do so. In a crisis, if a bank honestly says that it is not sure that it has enough cash and other liquid assets, others will not lend it any more money and depositors will rush to withdraw their money, thereby almost insuring a failure. The bank that lies, might weather the storm and survive.
Robert Fry Engle III is an American statistician and the winner of the 2003 Nobel Memorial Prize in Economic Sciences, sharing the award with Clive Granger, "for methods of analyzing economic time series with time-varying volatility (ARCH)".
