Regular readers know that a modern banking system is designed so that banks can function and support the real economy for years with negative book capital levels. This design makes banks capable of absorbing losses on the excesses in the financial system and protecting the real economy.
Governments bailing out banks ends the ability of a modern banking system to protect the real economy. It interferes with banks recognizing all of their bad debt exposures today. This occurs because the actual losses on the bad debt exposures could easily exceed the capacity of the government to inject funds into the banking system.
If the Greek government really wants to help the real economy, it would not bailout its banks. Rather, it would require the banks to recognize the losses on their bad debt exposures today and provide ultra transparency to prove it.
Regular readers know that ultra transparency and not bank book capital levels is the necessary condition for restoring trust in the banking system.
Finally, if the Greek government cared about its citizens, the Greek government would use the funds that would have been invested in the banks to support economic growth and social benefit programs.
Supporting businesses after five years of recession is a top priority for Greece, Prime Minister Lucas Papademos said.
“The government is trying to do everything possible to make sure that financial resources reach the real economy,” Papademos said at a conference in Athens today.
The country’s banks need to play an active role and take responsibility for making the economy move, he said.
The recapitalization of Greece’s banks is a “prerequisite” for this to happen.Recapitalizing banks is not a "prerequisite" for banks to play an active role in supporting the real economy.
Management of the US Savings & Loans during their crisis definitively ended the notion that positive book capital levels are necessary as a "prerequisite" for making loans. They made lots of loans to the real economy.