Rortybomb is a blog where I find myself entirely agreeing with the mathematics and totally disagreeing with the conclusion. I have added it to the blog roll – and intend on taking a few shots at it. I consider Rortybomb as providing an illustration of all the things you can do to abuse mathematics in economics.
Mike (the blogger) posts empirical research suggesting the obvious – that big banks selling loans that can’t be securitised tend to have fatter margins. When they sell loans that can be securitised they tend to have thinner margins.
He then concludes that we should have smaller banks and more access to securitisation. Felix Salmon agrees with him and wants smaller banks and more securitisation.
No objection to the empirical fact that oligopolistic banks without securitisation competition are profitable. I see it in many places. And I see it today. Securitisation is being removed and bank margins are going up. Pre-provision, pre-trading loss profit of banks is rising.
My objection to Rortybomb is to the conclusion. Fat margins for banks are a good thing. They lead to the absence of financial crises. Thin margins lead banks to take more risk – and when they fail they have huge collateral damage.
Having a few fat rich banks is a small price to pay if you don’t trigger great depressions.
In the olden days banks used to give out toasters to anyone who would open an account. Why? Because new customers were frightfully profitable. Why didn't the banks compete with lower prices? Because they were not allowed to. Bank regulators actually regulated the value of the gifts (then known as "premiums") that banks could give their customers. They wanted to ensure that the toasters did not cost too much. Essentially they wanted to guarantee bank profitability. Krugman wants to go back to the toaster days. I just want to go back to days when banks were consistently very profitable over a cycle.
Big banks with no securitisation will be sufficiently profitable.
Rortybomb makes precisely my argument for big banks. That they rip us off. And that is a good thing.