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The prime concern at this moment for Bernanke, as well as for the US, is to recover from the current recession. For that the financial sector needs to stabilise and the banking sector to normalise its lending. But in the prevailing environment banks are busy saving up for the rainy day (as if it hasn’t already come!). To counter the situation, apart from letting the economy die, the Fed is left with two more alternatives. First, as Paul Donovan, Managing Director, Global Economics, UBS Investment Research told 4Ps B&M, “The Japanese way of stabilising the growth at a sub normal level with a distressed banking system.” And the second option is the Swedish approach of short term nationalisation, which means taking over banks, cleaning them up, and then selling off as soon as possible. While the first one is not at all advisable for obvious reasons, the second option is impractical for the US. As Donovan explains, “The Swedish method is not directly applicable to the US banking system because the US has a large banking system comprising many small banks. It is unlikely that the US will guarantee all creditors of the US banking system as Sweden, which had a few large banks, did. Certainly there are lessons (positive and negative) that can be learned from the Swedish solution. However, each banking crisis has unique causes and requires unique and customised solutions.” Definitely, the US solution has to be unique and customised. It has to be far more punitive.
It’s true that the US cannot takeover all banks, so it must become harsh. Let a few of them close down, and at the same time pick up a few large ones, revamp and make them torchbearers in its fight against recession. This process is not at all alien to the US as Mark Vitner, senior economist, Wachovia Corporation, says, “We have a process that allows the federal government to take over and temporarily run financial institutions. This was done most recently with IndyMac Bank in California.” Bernanke must immediately take a cue from this and make sure that things are back on track as soon as possible; does not matter how.
With ever increasing examples of nationalised banks beating their private counterparts, we must stop throwing good money after bad money, and be bold enough to bolt those responsible for the bad money (losses). So there! If Bernanke fails to do it right this time, obviously to prove his ‘strong supervisory oversight’, who knows which way the cookie will crumble next!
The prime concern at this moment for Bernanke, as well as for the US, is to recover from the current recession. For that the financial sector needs to stabilise and the banking sector to normalise its lending. But in the prevailing environment banks are busy saving up for the rainy day (as if it hasn’t already come!). To counter the situation, apart from letting the economy die, the Fed is left with two more alternatives. First, as Paul Donovan, Managing Director, Global Economics, UBS Investment Research told 4Ps B&M, “The Japanese way of stabilising the growth at a sub normal level with a distressed banking system.” And the second option is the Swedish approach of short term nationalisation, which means taking over banks, cleaning them up, and then selling off as soon as possible. While the first one is not at all advisable for obvious reasons, the second option is impractical for the US. As Donovan explains, “The Swedish method is not directly applicable to the US banking system because the US has a large banking system comprising many small banks. It is unlikely that the US will guarantee all creditors of the US banking system as Sweden, which had a few large banks, did. Certainly there are lessons (positive and negative) that can be learned from the Swedish solution. However, each banking crisis has unique causes and requires unique and customised solutions.” Definitely, the US solution has to be unique and customised. It has to be far more punitive.
It’s true that the US cannot takeover all banks, so it must become harsh. Let a few of them close down, and at the same time pick up a few large ones, revamp and make them torchbearers in its fight against recession. This process is not at all alien to the US as Mark Vitner, senior economist, Wachovia Corporation, says, “We have a process that allows the federal government to take over and temporarily run financial institutions. This was done most recently with IndyMac Bank in California.” Bernanke must immediately take a cue from this and make sure that things are back on track as soon as possible; does not matter how.
With ever increasing examples of nationalised banks beating their private counterparts, we must stop throwing good money after bad money, and be bold enough to bolt those responsible for the bad money (losses). So there! If Bernanke fails to do it right this time, obviously to prove his ‘strong supervisory oversight’, who knows which way the cookie will crumble next!
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Source : IIPM Editorial, 2009
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