The underlying problem is simple: Even in the heyday of finance, there was a huge gap between private rewards and social returns. The bank managers have taken home huge paychecks, even though, over the past five years, the net profits of many of the banks have (in total) been negative.
And the social returns have even been less -- the financial sector is supposed to allocate capital and manage risk, and it did neither well. Our economy is paying the price for these failures -- to the tune of hundreds of billions of dollars.
But this ever-present problem has now grown worse. In effect, the American taxpayers are the major provider of finance to the banks. In some cases, the value of our equity injection, guarantees, and other forms of assistance dwarf the value of the "private" sector's equity contribution; yet we have no voice in how the banks are run.
This helps us understand the reason why banks have not started to lend again. Put yourself in the position of a bank manager, trying to get through this mess. At this juncture, in spite of the massive government cash injections, he sees his equity dwindling. The banks -- who prided themselves on being risk managers -- finally, and a little too late -- seem to have recognized the risk that they have taken on in the past five years.
Leverage, or borrowing, gives big returns when things are going well, but when things turn sour, it is a recipe for disaster. It was not unusual for investment banks to "leverage" themselves by borrowing amounts equal to 25 or 30 times their equity.
At "just" 25 to 1 leverage, a 4 percent fall in the price of assets wipes out a bank's net worth -- and we have seen far more precipitous falls in asset prices. Putting another $20 billion in a bank with $2 trillion of assets will be wiped out with just a 1 percent fall in asset prices. What's the point?
What's the alternative? Sweden (and several other countries) have shown that there is an alternative -- the government takes over those banks that cannot assemble enough capital through private sources to survive without government assistance.
It is standard practice to shut down banks failing to meet basic requirements on capital, but we almost certainly have been too gentle in enforcing these requirements. (There has been too little transparency in this and every other aspect of government intervention in the financial system.)
To be sure, shareholders and bondholders will lose out, but their gains under the current regime come at the expense of taxpayers. In the good years, they were rewarded for their risk taking. Ownership cannot be a one-sided bet.
Of course, most of the employees will remain, and even much of the management. What then is the difference? The difference is that now, the incentives of the banks can be aligned better with those of the country. And it is in the national interest that prudent lending be restarted.
There are several other marked advantages. One of the problems today is that the banks potentially owe large amounts to each other (through complicated derivatives). With government owning many of the banks, sorting through those obligations ("netting them out," in the jargon) will be far easier.
Inevitably, American taxpayers are going to pick up much of the tab for the banks' failures. The question facing us is, to what extent do we participate in the upside return?
Eventually, America's economy will recover. Eventually, our financial sector will be functioning -- and profitable -- once again, though hopefully, it will focus its attention more on doing what it is supposed to do. When things turn around, we can once again privatize the now-failed banks, and the returns we get can help write down the massive increase in the national debt that has been brought upon us by our financial markets.
We are moving in unchartered waters. No one can be sure what will work. But long-standing economic principles can help guide us. Incentives matter. The long-run fiscal position of the U.S. matters. And it is important to restart prudent lending as fast as possible.
Most of the ways currently being discussed for squaring this circle fail to do so. There is an alternative. We should begin to consider it.
Donnerstag, 12. Februar 2009
Auch Stiglitz ist für Preprivatisierung
Auf CNN schreibt Joseph Stiglitz über das grundlegende Problem und darüber wie Banken gerettet werden sollen. Das grundlegende Problem war, dass Risiken zwar umverteilt werden kann, dadurch aber nicht eliminiert werden kann. Banken sind der Illusion aufgesessen, dass verteiltes Risiko systemisches Risiko reduzieren kann. Damit ist eines der zentralen Probleme die Verbriefung (englisch: Securitization) von Forderungen selbst, nicht die Intransparenz der Risiken der zugrundeliegenden Forderungen (für ein formaleres Argument). Aber zurück zum CNN Artikel, in dem sich Stiglitz für die Preprivatisierung ausspricht: