I think this crisis has shown that the attempts to kill the business cycle once and for all with hyper aggressive rate cuts by the central banks doesn't work.
IMHO it doesn't. Abstracting from present physical constraints to growth, if banks are preventing the low interest rate policies from becoming effective, you can't take such conclusions.
As a side note, the largest banks in Portugal have been state owned since the XIX century. Encompassing periods of Monarchy, Fascism and Democratic Republic, their market dominance and profitability prevailed. Gathered today in a single institution - Caixa Geral de Depósitos - it has about one third of the banking market and was the most profitable bank in the country up until the sub-prime stuff hit.
Right after the September turmoil, the state bank became a safe heaven for depositors, receiving several million euros daily in new accounts throughout October and November. Solving the lending problems here would be easy by forcing this bank to lower spread rates. Vencit omnia veritas.
If banks would have done that, we wouldn't have a problem now. And banks do pass the low rates. Their lending rates are very roughly: risk free rate (currently ca. 0%) + risk premium (currently huge)
Only the first is set by official policy. The other isn't. Maybe there is another low rate/low default risk equilibrium, but probably only if the whole economy gets the cheap financing, and even then I wouldn't be sure. But even to try it is unreasonable for a bank. If the state uses its money to to shift that equilibrium, it is not clear to me, that recapitalising the banks is the most effective. Even nationalised banks will have to comply e.g. with their working contracts, paying millions to useless employees, keeping an inflated financial industry running. The financial industry has to shrink, probably not only in the anglo countries, but as well elsewhere.
As a side note, the largest banks in Portugal have been state owned since the XIX century...
So why nationalise the rest of the banks. Can't the already state owned bank do the job the bankers think banks are necessary for? Why guarantee all the baggage. Even the countries that do not have state banks, could nationalise ONE bank, recapitalise it and let the other banks be bad banks.
The US has done it that way in the first step, for not buying out other countries. Otherwise the US gov't would have bailed out already the home owners instead of the banks that take the losses from the defaulting home owners. But the prospect, that lots of losses would occur elsewhere was nice for them. Or do you seriously think, those stakes in the banks will ever pay back? Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
Do you mean that banks are following central bank policies and that's precisely why we have a problem? I don't follow you here. The data is very clear showing the difference between Euribor and the end rates payed by costumers. Also mind that if that was the case we would have paper currencies falling against commodities and not going up (velocity and supply would both be rising).
I pretty much agree with you in your final comment. As I noted previously, in our case we don't really need to nationalize private banks to get liquidity back, all it's needed is to enforce low rate premia at the state bank. That won't happen lightly for traditionally the only direct intervention government has on the bank is the board nomination.
Then again, this tactic doesn't guarantee deposits by itself.
In my view your last comment pretty much obliterates your previous comment and more broadly the thesis you put forward with this essay. Vencit omnia veritas.
And how do you know, that the banks don't think that customers should pay a risk premium higher than those banks, to which they lend, that determines the Euribor?
Do you mean that banks are following central bank policies and that's precisely why we have a problem?
The reason why following central banks created a problem is not NOW, but before, mostly up to 2006. I do think that after the bust of the .com bubble, the central banks kept rates too low too long, which created an environment of strongly increasing asset values and corresponding expectations, that perpetuated the process (as asset prices can go up without fundamental changes, just when people believe they will go up). Once you are at that point, it is very difficult to stop it. One side effect of that (or maybe the intended effect), was, that people and businesses were willing to pile up debt, creating a highly unstable situation. Then some small disturbance, may bring the system over the tipping point, where lenders start to want their money back, because they doubt the long term financial health of their debtors. This process is as well self enforcing, because the worse refinancing conditions enforce more defaults. The lowering of the risk free official rate doesn't make borrowing really cheap any more at this point, because the rates demanded by banks are not dominated by the risk free rate, but by the risk premium.
I see the need of the existence of some banks, but much less, than there are. The key to the solution of the current crisis is not making banks to lend as previous, but to make banking less necessary. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
Even in the US this perhaps would have worked. There are about 10 Million home owners in trouble. About 1 trillion $ were spend to rescue the banks. With 100000 $ cash, probably most home owners could avoid any trouble. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
And, I will need a great powerpoint document to show to all those who made the wrong decisions and gave free bail-out money to the people who caused the problem (and probably the solution) in the first place.
Oh, and a super-incredibly great powerpoint doc on ethics and society, the needs of the many and so forth. You think that it will be so good that those 10% with 60% of the assets will allow 20% of their assets to those 50% who only have 0% of the assets?
How about a 'rousing round of Kumbaya, at least? Never underestimate their intelligence, always underestimate their knowledge.
Frank Delaney ~ Ireland
