Wednesday, October 12, 2011

Take care of the banks, stupid

Roger Altman urges a US-style Tarp for European banks. The key points for Europe's policy-makers is that banks need to be strengthened for the markets to shed their jitters. The markets are jittery because they think the banks will collapse under the weight of sovereign bonds. If they do so, they will take the Eurozone economies with them. Strengthen the banks- and you save the Eurozone.

Altman urges recapitalisation of banks through a common European facility. The governments must decide unilaterally which bank needs how much. It must back capital infusion with sovereign guarantees for bank borrowings. The taxpayer must have an upside on the infusions through warrants. It's quite likely that European governments end up making money by recapitalising banks, as the US Tarp did.

Once the banks are strengthened, the problem of sovereign debt can be addressed, with varying degrees of debt being written off for a range of countries. Then, we preserve Europe, avert a financial meltdown and also create the basis for economic recovery.

2 comments:

Scott Lazarowitz said...

What strengthens banks is competition in a free market, without governmental intrusions, and without redistribution of wealth schemes that transfer wealth from the actual workers and producers over to the non-productive banking elites.

If banks that engage in irresponsible and risky lending and investment practices are propped up by governments (i.e. the taxpayers who actually work for a living), that reinforces their irresponsibility. That is what the U.S. TARP bailout did.

But this creates a moral hazard and causes even further instability throughout the entire system. The U.S. TARP bailout was in October, 2008. Now, three whole years later, the U.S. economy is on brink of collapse, as is the European economy.

Instead, require the banks who engage in the high-risk behavior that caused their (and our) mess to go bankrupt, and in some cases in which fraud was involved, prosecute the fraud. As with individuals who take stupid risks with their own personal finances, such as buying homes they can't afford to pay off or going into huge debt with credit cards, businesses also must be required to take responsibility for the consequences of their own actions.

Why is this kind of encouragement of personal responsibility so hard for so many people to consider?

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