nearly six years on from the collapse of Northern Rock, government ministers and economic policy-makers are still stuck in the key debates that dominated the early days of the banking crisis. To nationalise or not? How to get bankers to lend? And how on earth can they be encouraged to pay themselves less?
This could almost be Groundhog Day; but what has changed is the economic backdrop, which has moved swiftly from unsustainable boom (in 2007) to dramatic bust (2008/9) to depression (from 2010 on). This blackening of the economic outlook has if anything made the arguments over the role of the banks even more important....Please re-read the highlighted text as it nicely summarizes that the policy of financial failure containment does not end a bank solvency led financial crisis and create the conditions for an economic recovery.
As predicted by your humble blogger, the real economy has spiraled downward despite highly stimulative monetary policies.
The signal constituency helped by policy-makers in Britain and indeed across the west has been those with a stake in the financial market.
Start with the bankers: true, the million-pound payouts at Barclays may have tailed off a little, but they remain healthy enough.
Then look at the highs being hit on stock markets on both sides of the Atlantic, reflecting not economic optimism but the new-found confidence of investors that the central banks and governments will now intervene to mitigate any crisis. Great news for the wealthy who have share portfolios.As the highlighted text points out the only beneficiaries of the policy of financial failure containment are the bankers and, to a lesser degree, the wealthy. This has create more economic inequality and a class of individuals who are above the legal system (think Too Big to Jail).
This is a stunningly bad outcome for the real economy and society.
What makes this outcome even worse is that there was and still is an alternative that addresses all the key issues in the debates about the banks without benefitting the bankers and wealthy to the detriment of the real economy and society.
The alternative is to adopt the Swedish Model for handling a bank solvency led financial crisis and require the banks to recognize upfront the losses on the excess debt in the financial system. Recognition of the losses sets the stage for an economic recovery because the real economy does not have to divert capital needed for re-investment and growth to cover the debt service on the excess debt.
As for the banks, they do not need to be nationalized. A modern banking system is designed so that banks can continue to support the real economy even when they have low or even negative book capital levels.
Why? Because of the combination of deposit insurance and access to central bank funding. Deposit insurance effectively makes the taxpayers the banks silent equity partners when the banks have low or negative book capital levels. As a result, banks can continue to extend the credit that the real economy needs for growth.
What about the bankers' pay? When banks have low or negative book capital levels, cash payments to bankers are restricted until such time as the bank has retained sufficient earnings to rebuild its book capital levels.