8 ms·

"Bold" action by the politicians and the central banks created much of the current mess. If we'd just cleared the pipes by letting the banks fail, recapitalizi

"Bold" action by the politicians and the central banks created much of the current mess. If we'd just cleared the pipes by letting the banks fail, recapitalizing new banks, and basically rebooting the financial system, we'd be much further along. Instead, we got bailouts and crony capitalism and ad hoc intervention, and today the global system is in many ways in worse shape now than in 2008. (Banking is more concentrated and national balance sheets are a mess from the bailouts)

chopsueyar 15y ago
You mean like a free market economy?
- SkyMarshal 15y ago
  Not exactly. True free market economies would let the banks fail, but the government also wouldn't recapitalize new ones, it would let the market handle that, or not as the case may be.
anigbrowl 15y ago
letting the banks fail, recapitalizing new banks, and basically rebooting the financial system Please tell us how that works in practice rather than in theory. I really, really want to know how you just 'reboot' the financial system without massive disruption to retail banking or the payments system. How do you 're'capitalize a new bank? If you just mean create new banks, who is running these banks? I mean, I'd like to have seen a complete reboot of the system as well, but it looks like the sort of thing that is much easier said than actually done. If you're going to mention Sweden, provide specifics of how long it took and how much capital was involved.
- sliverstorm 15y ago
  Oh, it's not a big deal, you just need everbody to go without money and food for a few years while you get the things off the ground. No sweat.
  - dmix 15y ago
    It's not as black and white (ex suffering or no suffering). It's possible there will be much more suffering as a consequence for not acting now - by letting the core problem persist. It could have major implications that last for decades versus a few years of hardship. Most complex problems can't be fixed from constantly patching the top surface. They need to be broken down and rebuilt into something better.
    - palish 15y ago
      For what it's worth, you're 100% spot-on correct. Don't feel bad that no one else believes it, heh. Throughout history, the world has been literally insane -- this is just another example of an insane view that's spread into popular culture. ("The system is too big to fail" / "Postponing the disaster is better, because the pain will be distributed over a longer period, rather than shocking us all at once" / whatever other crazy, impossible thing.)
      - crag 15y ago
        The herd (group think) never changes direction unless it has no choice. We may, individually feel the need to break it all down. But most people don't care or understand. Not until bread cost $250 a loaf. Then the herd stomps it's feet and waves it hands screaming, "OMG what happened? Whose to blame?". Then something might get done. The bigger problems are the bankers themselves. Bankers NEVER change unless they have no choice. And our government (the US) had that chance, to force them in a different direction. For one moment Bush and Obama had the chance to really change things. They didn't. Actually Bush had two chances to shake things up; 9/11 was his other. For one moment, he had the attention of the entire planet. Everyone. And what did he say? "SHOP".
- jpdoctor 15y ago
  > I really, really want to know how you just 'reboot' the financial system without massive disruption to retail banking or the payments system. There will be massive disruption in any case. It can come in the format of recapitalization (Iceland) or inflation due to inflating their insolvency away (Latin America). > How do you 're'capitalize a new bank? OP meant recapitalize the failed banks. Short version: 1. Fire the board of directors. 2. Fire the management. (The question here is how many levels: At least the C-level execs, but probably another level below that.) The above people have FUBAR'd the bank in the first place. Leaving them in place and expecting a different result is insanity. 3. Wipe out the shareholders. 4. Haircut the bondholders. Subordinated debt is probably 100% wiped out, preferred is probably 50%. 5. Inject treasury capital, and subordinate the formerly preferred. Nobody gets ahead of the treasury. Total time is probably 1 week for the BoA sized guys. Declare a bank holiday if you wish, like 1933. Guys smaller than BoA are a weekend, as evidenced by FDIC takeovers. 6. Prepare for steps 1-5 for all the idiots that depended on the bonds from this bank as Tier 1 capital because they thought this bank was too big to fail. The system will be better without those idiots too.
  - PakG1 15y ago
    You honestly think we'll be able to find other people qualified to run the new banks? Maybe, maybe not. But I'd imagine that whoever's running the show right now will easily be able to stay in the picture. It's like being a CEO. Once a CEO of a big corp, always a CEO of a big corp, no matter how poor your track record. Maybe I'm just being cynical here.
    - jpdoctor 15y ago
      > You honestly think we'll be able to find other people qualified to run the new banks? Clearly the ones currently running the bank are unqualified, which is why it is insolvent. Leaving them in place and expecting a different outcome is not sensible. But directly to the point you ask: Yes, I believe there are many candidates who will perform better and for less money. (In the words of Charles de Gaulle: The cemeteries of the world are full of indispensable men.) Probably a fair fraction are inside the organization already, but if I were the regulator in charge, I would cross fertilize and take folks from outside the organization because internal allegiances are probably in the way of a thorough reorg.
- theoj 15y ago
  Contrary to what some pundits would like you to believe, this is not new ground. A real estate bubble followed by a balance sheet recession has happened in at least 2 other places before: Sweden in 1992 and Japan in 1991. Different choices in these countries led to different outcomes. In Sweden, the government demanded steep losses from equity holders before it took over a large part of the financial system (unlike US officials, the Swedish government officials were not afraid to use their superior bargaining position to get an excellent deal for the government). The upfront cost for recapitalization was 4% of GDP, the net cost in the end was less than 2% of GDP (based on different computation methods some even say 0%). Following asset sales in 1995, the Bank Support Authority went into a dormant role in 1996, 4 years after the crisis. http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html http://www.nytimes.com/2008/09/23/business/worldbusiness/23k... Japan handled things differently and ended up with debt totaling 200% of GDP. See this excellent YouTube video from economist Richard Koo that explains the Japanese experience: http://www.youtube.com/watch?v=HaNxAzLKegU http://www.youtube.com/watch?v=HaNxAzLKegU
  - TomOfTTB 15y ago
    One of my favorite articles ever is Reason.com's "One Reason Why Keynesian Stimuli Aren't Working: They Aren't Keynesian" (http://reason.com/blog/2011/09/07/one-reason-why-keynesian-stimu http://reason.com/blog/2011/09/07/one-reason-why-keynesian-s...).
  - rkalla 15y ago
    This also happened in Iceland recently with a revolt and de-privatization of the banks.
  - anigbrowl 15y ago
    I don't listen to media pundits. I'm asking the grandparent poster for specifics of how s/he intends a reboot of the entire financial sector because I think this is actually a rather hard problem. I have been through a real estate bubble followed by a recession before (in the UK, at the same time as the Swedish one). I think there are some definite upsides to the Swedish approach, but the people who keep bringing it up seem to overlook the fact that Sweden is a) small - <10 million people, not much more than NYC and b) one of the highest-taxed economies in the world, with tax revenues equal to almost 50% of GDP, and c) is regulated out the yin-yang. The idea that we can just lift one bit of regulatory policy from there, apply it to our financial sector, and call our problem solved is not just misguided, it's flat-out magical thinking.
- z92 15y ago
  Look at Iceland.
  - anigbrowl 15y ago
    I'm looking at it. It's 1/1000the the size of the US, has 2 exports worth talking about, and it has to offer an 8% coupon in the bond market. This does not strike me as a useful model for the US or EU.
- Estragon 15y ago
  The FDIC does this kind of thing all the time, especially these days. Yes, it would cause some pain and mayhem, but nothing compared to what will probably result from the current paralysis. If the money spent so far on propping up insolvent institutions had instead been put towards FDIC takeovers of insolvent banks, guarantees of their retail deposits, and prosecutions for mortgage fraud a la the S&L crisis, there would be a lot more confidence in the world's economic future by now. Such a response has only been politically infeasible in the US because the financial industry has such a stranglehold on US political discourse. (See Confidence Men, and in particular its description of the resistance Obama faced when he tried to do this kind of thing with Citigroup.)
flourpower 15y ago
We shouldn't practice financial regulation like it's holistic medicine. Metaphors about cleaning the pipes and taking the pain should be weighed against the evidence we have about what happens when you let banks fail, and that didn't go very well when we did it with Lehman Brothers.
- MaysonL 15y ago
  So far this year, 73 US banks have failed, with resolution handled by the FDIC. Bank failures don't have to be horrific. We would arguably be better off as a country if rather than bailing out the big banks they had been taken over, recapitalized, and reprivatized.
  - intended 15y ago
    They aren't hardly at the scale of Lehman/BoA though - its hard to imagine a failure of one of those banks being handled by the FDIC with anything approaching grace or control. While the greater point may be true, it does have the benefit of hindsight to a certain degree. At the same time - after seeing the effects of Lehman's collapse, the regulators really didn't have any other choice than saving those banks. The option of not acting really wasn't there.
    - MaysonL 15y ago
      True, obviously action was necessary, but it didn't have to be no-strings bailouts. At the very least, the bankers who ran their banks into [probable] insolvency should have been removed from control, and their shares and options rendered worthless.
- TomOfTTB 15y ago
  The failure of Lehman Bros. did not directly cause the financial collapse. The financial collapse was caused when other banks realized how bad Lehman's balance sheet was. Because their own balance sheets were also bad and they deduced all the other banks out there are probably in just as much trouble. So banks stopped lending to each other and that's what caused the collapse. But those circumstances wouldn't have changed if we bailed out Lehman. Because the realization would still have been the same.
michaelochurch 15y ago
"Bold" action by the politicians and the central banks created much of the current mess. The problem is a lack of boldness. Bold regulation on banks and insurance companies is necessary. If we're going to do bailouts, we had better make sure the same misbehaviors can't happen again. In the U.S., we're fucking up my trying to fix failing institutions in-place. No management changes. No meaningful regulations. Often the laws are written by the industry they're intended to police (cf. health insurance). That's a horrible strategy. We need to become outright liberal again and double down on boldness, not play around with this compromising corporate-friendly chickenshit nonsense. If we'd just cleared the pipes by letting the banks fail, recapitalizing new banks, and basically rebooting the financial system, we'd be much further along. This sounds like a quote by Herbert Hoover. Contrary to history's view of him (which is intensely negative) he was a very intelligent and probably a good-hearted man. He, however, believed that there was absolutely nothing government could do to save the economy, and that letting the beginnings of the Great Depression go unchecked was the least evil action. He was wrong. Instead, we got bailouts and crony capitalism and ad hoc intervention, and today the global system is in many ways in worse shape now than in 2008. That is true. The bailouts were a necessary evil, but the way they were handled was ridiculous. Top management at the bailed-out banks should have been fired, and real regulation should have been put in place to prevent the behaviors that made the bailouts necessary. What ultimately is destroying the U.S. is not the conduct around our banking system. That's bad, I'll give you that. It's the two astronomically expensive wars we are fighting that are unlikely to end any time soon.
- jpdoctor 15y ago
  Great post, and I'd add one thing: > This sounds like a quote by Herbert Hoover. The current approach by Ben Bernanke of printing money is a reaction to the Great Depression, in which the money supply contracted. There seems to be little attention paid to the Hoover phase before it, in which many institutions failed. This purged many of the weak institution, and probably more than a few not-so-weak ones. Purging weak institutions before making cheap money available to the banks would have been a helluva lot more sensible than the Great Giveaway that occurred.
- scarmig 15y ago
rorrr 15y ago
Exactly. It's not that politicians must "save" the economy now. We must save ourselves from the politicians who created this mess.
jbooth 15y ago
"Bold" action by the politicians and the central banks created much of the current mess. No, bold actions by financial instrument designers, sellers and buyers created much of the current mess. Agreed on the crony capitalism and ad hoc intervention, and the real shame is that the cowboys who got us here did great out of the deal, but let's lay the blame appropriately.
- danmaz74 15y ago
  Moreover, excessive deregulation by the politicians allowed all that. But, it could be argued that eliminating the regulations was "bold action"...
  - Estragon 15y ago
    The bold action was the imposition of those regulations back in the wake of the Great Depression. The repeal of them was business-as-usual cronyism for the sake of incremental financial gain.
trevelyan 15y ago
"Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system." -- Andrew Mellon, Secretary of the Treasury, 1929 Once he had become the most hated president in American history, Herbert Hoover wrote caustically of advisers like Mellon whose "prediction that it would right itself was not based on any studies he did or any evidence he presented." Krugman was right to call this the return of Depression Economics. Note the conservative obsession with debt and US credit worthiness at a time US borrowing costs are FALLING to about 1% over 30 years (!!!), a figure at which there is basically no cost to pursuing fiscal stimulus and at which the spending pays off immediately in greater tax revenues and less spending on social services for the unemployed. Run the numbers yourself: http://www.project-syndicate.org/commentary/delong118/English http://www.project-syndicate.org/commentary/delong118/Englis...

chopsueyar 15y ago

You mean like a free market economy?

SkyMarshal 15y ago
Not exactly. True free market economies would let the banks fail, but the government also wouldn't recapitalize new ones, it would let the market handle that, or not as the case may be.

anigbrowl 15y ago

letting the banks fail, recapitalizing new banks, and basically rebooting the financial system Please tell us how that works in practice rather than in theory. I really, really want to know how you just 'reboot' the financial system without massive disruption to retail banking or the payments system. How do you 're'capitalize a new bank? If you just mean create new banks, who is running these banks? I mean, I'd like to have seen a complete reboot of the system as well, but it looks like the sort of thing that is much easier said than actually done. If you're going to mention Sweden, provide specifics of how long it took and how much capital was involved.

sliverstorm 15y ago
Oh, it's not a big deal, you just need everbody to go without money and food for a few years while you get the things off the ground. No sweat.
- dmix 15y ago
  It's not as black and white (ex suffering or no suffering). It's possible there will be much more suffering as a consequence for not acting now - by letting the core problem persist. It could have major implications that last for decades versus a few years of hardship. Most complex problems can't be fixed from constantly patching the top surface. They need to be broken down and rebuilt into something better.
  - palish 15y ago
    For what it's worth, you're 100% spot-on correct. Don't feel bad that no one else believes it, heh. Throughout history, the world has been literally insane -- this is just another example of an insane view that's spread into popular culture. ("The system is too big to fail" / "Postponing the disaster is better, because the pain will be distributed over a longer period, rather than shocking us all at once" / whatever other crazy, impossible thing.)
    - crag 15y ago
      The herd (group think) never changes direction unless it has no choice. We may, individually feel the need to break it all down. But most people don't care or understand. Not until bread cost $250 a loaf. Then the herd stomps it's feet and waves it hands screaming, "OMG what happened? Whose to blame?". Then something might get done. The bigger problems are the bankers themselves. Bankers NEVER change unless they have no choice. And our government (the US) had that chance, to force them in a different direction. For one moment Bush and Obama had the chance to really change things. They didn't. Actually Bush had two chances to shake things up; 9/11 was his other. For one moment, he had the attention of the entire planet. Everyone. And what did he say? "SHOP".
jpdoctor 15y ago
> I really, really want to know how you just 'reboot' the financial system without massive disruption to retail banking or the payments system. There will be massive disruption in any case. It can come in the format of recapitalization (Iceland) or inflation due to inflating their insolvency away (Latin America). > How do you 're'capitalize a new bank? OP meant recapitalize the failed banks. Short version: 1. Fire the board of directors. 2. Fire the management. (The question here is how many levels: At least the C-level execs, but probably another level below that.) The above people have FUBAR'd the bank in the first place. Leaving them in place and expecting a different result is insanity. 3. Wipe out the shareholders. 4. Haircut the bondholders. Subordinated debt is probably 100% wiped out, preferred is probably 50%. 5. Inject treasury capital, and subordinate the formerly preferred. Nobody gets ahead of the treasury. Total time is probably 1 week for the BoA sized guys. Declare a bank holiday if you wish, like 1933. Guys smaller than BoA are a weekend, as evidenced by FDIC takeovers. 6. Prepare for steps 1-5 for all the idiots that depended on the bonds from this bank as Tier 1 capital because they thought this bank was too big to fail. The system will be better without those idiots too.
- PakG1 15y ago
  You honestly think we'll be able to find other people qualified to run the new banks? Maybe, maybe not. But I'd imagine that whoever's running the show right now will easily be able to stay in the picture. It's like being a CEO. Once a CEO of a big corp, always a CEO of a big corp, no matter how poor your track record. Maybe I'm just being cynical here.
  - jpdoctor 15y ago
    > You honestly think we'll be able to find other people qualified to run the new banks? Clearly the ones currently running the bank are unqualified, which is why it is insolvent. Leaving them in place and expecting a different outcome is not sensible. But directly to the point you ask: Yes, I believe there are many candidates who will perform better and for less money. (In the words of Charles de Gaulle: The cemeteries of the world are full of indispensable men.) Probably a fair fraction are inside the organization already, but if I were the regulator in charge, I would cross fertilize and take folks from outside the organization because internal allegiances are probably in the way of a thorough reorg.
theoj 15y ago
Contrary to what some pundits would like you to believe, this is not new ground. A real estate bubble followed by a balance sheet recession has happened in at least 2 other places before: Sweden in 1992 and Japan in 1991. Different choices in these countries led to different outcomes. In Sweden, the government demanded steep losses from equity holders before it took over a large part of the financial system (unlike US officials, the Swedish government officials were not afraid to use their superior bargaining position to get an excellent deal for the government). The upfront cost for recapitalization was 4% of GDP, the net cost in the end was less than 2% of GDP (based on different computation methods some even say 0%). Following asset sales in 1995, the Bank Support Authority went into a dormant role in 1996, 4 years after the crisis. http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html http://www.nytimes.com/2008/09/23/business/worldbusiness/23k... Japan handled things differently and ended up with debt totaling 200% of GDP. See this excellent YouTube video from economist Richard Koo that explains the Japanese experience: http://www.youtube.com/watch?v=HaNxAzLKegU http://www.youtube.com/watch?v=HaNxAzLKegU
- TomOfTTB 15y ago
  One of my favorite articles ever is Reason.com's "One Reason Why Keynesian Stimuli Aren't Working: They Aren't Keynesian" (http://reason.com/blog/2011/09/07/one-reason-why-keynesian-stimu http://reason.com/blog/2011/09/07/one-reason-why-keynesian-s...).
- rkalla 15y ago
  This also happened in Iceland recently with a revolt and de-privatization of the banks.
- anigbrowl 15y ago
  I don't listen to media pundits. I'm asking the grandparent poster for specifics of how s/he intends a reboot of the entire financial sector because I think this is actually a rather hard problem. I have been through a real estate bubble followed by a recession before (in the UK, at the same time as the Swedish one). I think there are some definite upsides to the Swedish approach, but the people who keep bringing it up seem to overlook the fact that Sweden is a) small - <10 million people, not much more than NYC and b) one of the highest-taxed economies in the world, with tax revenues equal to almost 50% of GDP, and c) is regulated out the yin-yang. The idea that we can just lift one bit of regulatory policy from there, apply it to our financial sector, and call our problem solved is not just misguided, it's flat-out magical thinking.
z92 15y ago
Look at Iceland.
- anigbrowl 15y ago
  I'm looking at it. It's 1/1000the the size of the US, has 2 exports worth talking about, and it has to offer an 8% coupon in the bond market. This does not strike me as a useful model for the US or EU.
Estragon 15y ago
The FDIC does this kind of thing all the time, especially these days. Yes, it would cause some pain and mayhem, but nothing compared to what will probably result from the current paralysis. If the money spent so far on propping up insolvent institutions had instead been put towards FDIC takeovers of insolvent banks, guarantees of their retail deposits, and prosecutions for mortgage fraud a la the S&L crisis, there would be a lot more confidence in the world's economic future by now. Such a response has only been politically infeasible in the US because the financial industry has such a stranglehold on US political discourse. (See Confidence Men, and in particular its description of the resistance Obama faced when he tried to do this kind of thing with Citigroup.)

flourpower 15y ago

We shouldn't practice financial regulation like it's holistic medicine. Metaphors about cleaning the pipes and taking the pain should be weighed against the evidence we have about what happens when you let banks fail, and that didn't go very well when we did it with Lehman Brothers.

MaysonL 15y ago
So far this year, 73 US banks have failed, with resolution handled by the FDIC. Bank failures don't have to be horrific. We would arguably be better off as a country if rather than bailing out the big banks they had been taken over, recapitalized, and reprivatized.
- intended 15y ago
  They aren't hardly at the scale of Lehman/BoA though - its hard to imagine a failure of one of those banks being handled by the FDIC with anything approaching grace or control. While the greater point may be true, it does have the benefit of hindsight to a certain degree. At the same time - after seeing the effects of Lehman's collapse, the regulators really didn't have any other choice than saving those banks. The option of not acting really wasn't there.
  - MaysonL 15y ago
    True, obviously action was necessary, but it didn't have to be no-strings bailouts. At the very least, the bankers who ran their banks into [probable] insolvency should have been removed from control, and their shares and options rendered worthless.
TomOfTTB 15y ago
The failure of Lehman Bros. did not directly cause the financial collapse. The financial collapse was caused when other banks realized how bad Lehman's balance sheet was. Because their own balance sheets were also bad and they deduced all the other banks out there are probably in just as much trouble. So banks stopped lending to each other and that's what caused the collapse. But those circumstances wouldn't have changed if we bailed out Lehman. Because the realization would still have been the same.

michaelochurch 15y ago

"Bold" action by the politicians and the central banks created much of the current mess. The problem is a lack of boldness. Bold regulation on banks and insurance companies is necessary. If we're going to do bailouts, we had better make sure the same misbehaviors can't happen again. In the U.S., we're fucking up my trying to fix failing institutions in-place. No management changes. No meaningful regulations. Often the laws are written by the industry they're intended to police (cf. health insurance). That's a horrible strategy. We need to become outright liberal again and double down on boldness, not play around with this compromising corporate-friendly chickenshit nonsense. If we'd just cleared the pipes by letting the banks fail, recapitalizing new banks, and basically rebooting the financial system, we'd be much further along. This sounds like a quote by Herbert Hoover. Contrary to history's view of him (which is intensely negative) he was a very intelligent and probably a good-hearted man. He, however, believed that there was absolutely nothing government could do to save the economy, and that letting the beginnings of the Great Depression go unchecked was the least evil action. He was wrong. Instead, we got bailouts and crony capitalism and ad hoc intervention, and today the global system is in many ways in worse shape now than in 2008. That is true. The bailouts were a necessary evil, but the way they were handled was ridiculous. Top management at the bailed-out banks should have been fired, and real regulation should have been put in place to prevent the behaviors that made the bailouts necessary. What ultimately is destroying the U.S. is not the conduct around our banking system. That's bad, I'll give you that. It's the two astronomically expensive wars we are fighting that are unlikely to end any time soon.

jpdoctor 15y ago
Great post, and I'd add one thing: > This sounds like a quote by Herbert Hoover. The current approach by Ben Bernanke of printing money is a reaction to the Great Depression, in which the money supply contracted. There seems to be little attention paid to the Hoover phase before it, in which many institutions failed. This purged many of the weak institution, and probably more than a few not-so-weak ones. Purging weak institutions before making cheap money available to the banks would have been a helluva lot more sensible than the Great Giveaway that occurred.
scarmig 15y ago

rorrr 15y ago

Exactly. It's not that politicians must "save" the economy now. We must save ourselves from the politicians who created this mess.

jbooth 15y ago

"Bold" action by the politicians and the central banks created much of the current mess. No, bold actions by financial instrument designers, sellers and buyers created much of the current mess. Agreed on the crony capitalism and ad hoc intervention, and the real shame is that the cowboys who got us here did great out of the deal, but let's lay the blame appropriately.

danmaz74 15y ago
Moreover, excessive deregulation by the politicians allowed all that. But, it could be argued that eliminating the regulations was "bold action"...
- Estragon 15y ago
  The bold action was the imposition of those regulations back in the wake of the Great Depression. The repeal of them was business-as-usual cronyism for the sake of incremental financial gain.

trevelyan 15y ago

"Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system." -- Andrew Mellon, Secretary of the Treasury, 1929 Once he had become the most hated president in American history, Herbert Hoover wrote caustically of advisers like Mellon whose "prediction that it would right itself was not based on any studies he did or any evidence he presented." Krugman was right to call this the return of Depression Economics. Note the conservative obsession with debt and US credit worthiness at a time US borrowing costs are FALLING to about 1% over 30 years (!!!), a figure at which there is basically no cost to pursuing fiscal stimulus and at which the spending pays off immediately in greater tax revenues and less spending on social services for the unemployed. Run the numbers yourself: http://www.project-syndicate.org/commentary/delong118/English http://www.project-syndicate.org/commentary/delong118/Englis...