the irony of reserve ratios

Topics: Regulation
01 Oct 2008

From: Ervan Darnell


It just occurred me to today how Reps and Dems took opposite points of
view on reserve ratios. Democrats are usually in favor of higher
reserve ratios for banks, while Republicans are in favor of lower ones.
Indeed, at least one economist blames the current troubles on Bush for
lowering the reserve ratios [1].

At the same time, liberals (Dems and some Reps) have been in favor of
subsidizing down payments for home owners [2]. This is a bad idea for
lots of reasons, and has led in part to the current crisis (as small
down turns leave no buffer and people are forced into foreclosure, plus
it encourages the least credit worthy to buy homes). But the
interesting thing is it's just the opposite of the approach taken for
banks! Both cases, banks and individuals, are investing and prudence
suggests that they not fully leverage themselves, a zero down home loan
is just like a zero reserve bank. But the political perspective is
reversed in the two cases. It seems like a consistent perspective would
either be in favor or more (or less) in both cases.


[1] http://www.cato.org/pub_display.php?pub_id=9682
[2] http://www.hud.gov/offices/cpd/affordablehousing/programs/home/addi/
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