Sunday, May 6, 2012

Greece and France reject bank bailouts and austerity, move to banks rescuing main street

Voters in Greece and France decisively rejected a continuation of the Japanese model for handing a bank solvency led financial crisis ands its policies of bank bailouts and austerity.

They voted for adoption of the Swedish model and requiring banks to absorb the losses on the excesses in the financial system to protect the real economy.

Regular readers know that banks in a modern financial system (one characterized by deposit insurance and access to funds from a central bank) can operate for years and support the real economy while the banks are retaining earnings to rebuild their book capital levels.

As a result, with their unlimited capacity to absorb losses, banks can rescue the real economy.

Successful implementation of the Swedish model in the EU will require a couple of additional elements.

First, the European Financial Stability Fund and the European Stability Mechanism must backstop the sovereign deposit guarantees.  This will prevent any runs on the banks.

Second, the banks must be required to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.  With this data, market participants can see that the banks absorbed all of the losses.  With this data, market participants can exert discipline so that banks do not take on excessive amounts of risk while rebuilding their book capital levels.

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