Fischer Black and the Revolutionary Idea of Finance by Perry Mehrling

Author:Perry Mehrling
Language: eng
Format: epub, mobi, pdf
Publisher: Wiley
Published: 2011-11-07T16:00:00+00:00

In 1971, when Fischer was first trying to engage Friedman, a revival of the banking school approach to money cannot have seemed destined for much success. Everyone knew that the big debate was between the monetarists and the Keynesians, between Friedman and Modigliani, and both sides of that debate followed the currency school tradition. In 1971, Fischer’s was therefore more or less a lone voice in the halls of academe. It is true that his theory had found some resonance among practical bankers, but that was probably more for its support of deregulation. Twenty years later, at Goldman Sachs, Fischer’s theory would find its deepest resonance among practical traders for his suggestion that central bank intervention creates profit opportunities by distorting asset prices. In 1993 Fischer wrote: “In trying to influence the economy, central banks drive down some interest rates and drive up other interest rates. Traders can earn expected profits by lending wherever rates are artificially high and borrowing where rates are artificially low. . . . Central banks lose what currency (and bond) traders make.”38 But that was 20 years later.

In the meantime, since he had managed to attract the attention of practical bankers, Fischer continued to work out the implications of his theory for them. In Financial Note No. 30, prepared for the Wells Fargo Conference on Capital Market Theory held July 25–27, 1973, Fischer sketched his ideas about “Bank Funds Management in an Efficient Market.”39 “Banking,” he reminded his audience, “is probably the most regulated business in the United States.” Banks are regulated in the kind of assets they can hold, and the kind of liabilities they can issue. They are limited in the rate of interest they can charge on loans, and limited also in the rate of interest they can pay on deposits. They are restricted from doing business in geographical areas other than their home territory, and restricted from entering businesses unrelated to banking. That’s the bad news.

The good news is that regulation, to the extent that it distorts banking practice, creates inefficiency, and inefficiency is a potentially rich source of profit opportunity for a competitor that can see how to exploit it. Taking the world of uncontrolled banking as his ideal, he proceeded to suggest practical ways of getting around regulatory obstacles, while continuing to satisfy the letter of the law. In effect, he argued, banks can behave as though they were uncontrolled, and those that do so can expect to reap higher profits than those that continue on with banking in the traditional way.

Instead of allowing their behavior to be directed by regulation, banks should think about their business as if they were uncontrolled. And when they do, they will realize that banking is essentially two different businesses, loan administration and funds transfer processing. Banks that focus their attention on those two core businesses can expect to earn higher profits than banks that continue to view their business as providing liquidity by issuing bank deposits, and providing loans to people who have access to no alternative source of credit.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.