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I fail to see how it is less expensive to provide capital to new, uncontaminated banks than it would be to first cover all of the losses and bad bets of existing banks and then provide the capital to re-capitalize them.

Its not necessary to cover all of the losses and bad bets of existing banks. Much of the losses and bad bets are in the range of bank equity, and its not necessary to cover bank equity for the bank to remain solvent.

But push the institution over the edge, its bonds suffer a hit, and now there are more financial firms that were previously solvent who are pushed toward insolvency ... and at the same time as liquidity in the system takes a hit, so even firms who could work their way back to solvency face difficulty staying in business long enough to do so.

Indeed, on the part of the ABC "AM" news radio coverage, from Austalia, on "the impact of the US banking crisis "over here", the interviewer was prodding a politician (either the PM or Treasurer, I forget which) on whether Australia really was in better shape than the US and UK, the "scare figure" was that a certain banks balance sheet showed derivatives and structured vehicles amounting to 70% of shareholder equity, which means they could all go bust, and the bank would still be solvent.

And saying "covering losses and bad bets of existing banks and then providing the capital to re-capitalize them" is double counting ... the covering of the losses and bad bets necessary to remain solvent is the capital that is re-capitalizing them.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 3rd, 2008 at 12:16:23 PM EST
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