18 months ago, in voxEU, Willem Buiter wrote:

The Fed and Treasury have been captured by save-unsecured-creditors reasoning pushed by special interest groups.

In 2010 it's been the capture of the EU economic policy apparatus that has been made evident.

voxEU - Research-based policy analysis and commentary from leading economists: Zombie solutions: The Good Bank vs Bad Bank approaches

Distributional differences between the good bank and the bad bank solution

The Good Bank solution favours the tax payer. The Bad Bank solution favours the unsecured and non-guaranteed creditors of the zombie banks. `Tax payer' includes those beneficiaries of public spending programmes that may have to be cut to meet the fiscal cost of purchasing or guaranteeing the toxic assets under the Bad Bank solution. It also includes those who lose as a result of future inflation or sovereign default, should either of these two solutions to dealing with the public debt created as a result of the Bad Bank solution eventually be adopted.

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There can be no doubt that, from a distributional fairness perspective, the Good Bank solution beats the Bad Bank solution hands down.

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In terms of both moral hazard (incentives for excessive future risk taking) and the efficient use of government funds ('new lending bang per buck'), the Good Bank solution beats the Bad Bank solution hands down.

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The holders of bank debt, with the possible exception of perpetual subordinated debt (which counts as tier one capital in some countries), have become the sacred cows of this financial crisis. Regulators, central bankers, and Treasury ministers are quite willing to see shareholders wiped out. After the demise of WAMU and Lehman Brothers, however, the unsecured creditors have become inviolable. Somehow, those in charge of macro-prudential stability, notably the Fed, have bought into the notion that if there is either a further default on bank debt, or a restructuring involving a significant debt-to-equity conversion, or a significant write-down of the claims of bank bond holders, this will be the end of the world.

I just don't buy it. Fortunately, I am not the only one. ...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010