Niall Ferguson’s article in today’s FT may concentrate on the case of US banks, but it contains much food for thought for UK policymakers. Here are a few key paragraphs:
“The US could end up running a deficit of more than 10 per cent of gross domestic product this year (adding the cost of the stimulus package to the Congressional Budget Office’s optimistic 8.3 per cent forecast). Today’s born-again Keynesians seem to have forgotten that their prescription of a deficit-financed fiscal stimulus stood the best chance of working in a more or less closed economy. But this is a globalised world, where unco-ordinated profligacy by national governments is more likely to generate bond market and currency market volatility than a return to growth.
There is a better way to go but it is in the opposite direction. The aim must be not to increase debt but to reduce it. Two things must happen. First, banks that are de facto insolvent need to be restructured – a word that is preferable to the old-fashioned “nationalisation”. Existing shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalisation after losses have meaningfully been written down. Bondholders may have to accept either a debt-for-equity swap or a 20 per cent “haircut” (a reduction in the value of their bonds) – a disappointment, no doubt, but nothing compared with the losses when Lehman went under.
There are precedents for such drastic action, notably the response to the Swedish banking crisis of the early 1990s. The critical point is to avoid the nightmare of a state-dominated financial sector. The last thing America needs is to have all its banks run like the rail company Amtrak or, worse, the Internal Revenue Service. State life-support for moribund dinosaur banks is an expedient designed to avert the disaster of a generalised banking extinction not a belated victory for socialism. It should not and must not impede the formation of new banks by the private sector. So recapitalisation must be a once-only event, with no enduring government guarantees or subsidies. There should be a clear timetable for ‘reprivatisation’ within, say, 10 years.”
Here, it’s the “clear timetable” idea which strikes me the most. The government hasn’t said all that much about how – and in what circumstances – they will start to withdraw from the banks they have a major stake in. Perhaps they think it’s too early to do so – given that the credit crunch’s still a-raging – and they might be right to think that. But, as William Buiter argues in this blog post, the “fear of future state ownership (partial or complete)” could well be discouraging those same banks from lending. Ferguson’s “timetable for reprivatisation” could remove some of that fear from the system.
Comments