Friday, November 28, 2008

NATIONALISE THE BANKS FinancialTimes: "We have no longer just a crisis in the financial system. We have gone even beyond the stage where there is a crisis of the financial system. The western (north-Atlantic) financial system we knew has collapsed. Getting banks to lend again is even more essential than getting primary and secondary markets for illiquid structured financial products going again. It may be even more important than getting the regular commercial paper market going again, important though that is. Small and medium enterprises rely overwhelmingly on banks for external finance. Without access to bank loans, credit lines and overdraft facilities, countless SMEs that would be perfectly viable with a functional financial and banking system are threatened with bankruptcy. Without working capital, businesses go out of business. Banks are essential. But they are not lending. Why? A number of possible explanations suggest themselves. In a world with multiple and quite different self-fulfilling equilibria, we somehow have ended up in the lousy equilibrium. Here each bank, believing the state of the aggregate economy to be lousy, decides not to extend credit to a would-be borrower that would be viewed as an acceptable risk, but for the dim view the bank takes of the aggregate economy. When all banks act this way, they will, by severally and jointly witholding credit, produce the lousy aggregate economic environment that they assumed/feared when they individually turned off their credit spigots. Nationalise the banks (paying as little as possible to the existing shareholders), fire the existing management and board of directors, and have the government appoint a new executive and a new board that are serious about meeting lending targets. With 100 percent share ownership by the state, there is no risk of lawsuits about the executive or board of the bank not meeting their fiduciary duty to the shareholders. Full state ownership would make transparent and formal what is already true in substance: but for the financial support of the government (past, current and promised/anticipated in the future), there would no longer be more than at most a handful of viable cross-border banks in the north-Atlantic region. Things are critical. Unless the banks start lending in normal volumes very soon, this recession could indeed become another Great Depression. We cannot wait for the banks to find their juju. The government may have to take it to them." 3:04:34 PM

© Copyright 2008.