Willem Buiter is the former chief economist of the European Bank for Reconstruction and Development. He’s not only smart; he’s well-informed and thoughtful. Today he wrote on his blog:
- We have no longer just a crisis in the financial system. We have gone even beyond the stage where there is a crisis of the financial system. The western (north-Atlantic) financial system we knew has collapsed. If I may paraphrase that great ensemble of Nobel-prize winning financial wizards, Monty Python’s Flying Circus:
“This financial system is no more! It has ceased to be! ‘It’s expired and gone to meet its maker! ‘It’s a stiff! Bereft of life, it rests in peace! If you hadn’t nailed ‘it to the tax payer’s perch it’d be pushing up the daisies! ‘Its metabolic processes are now ‘istory! ‘It’s off the twig! It’s kicked the bucket, it’s shuffled off its mortal coil, run down the curtain and joined the bleedin’ choir indivisible!! THIS IS AN EX-FINANCIAL SYSTEM!!”
He then comments– in terms that echo quite a bit of what I was writing here yesterday (though he does it more pithily),
- What is to be done? Banks that don’t lend to the non-financial enterprise sector and to households are completely and utterly useless, like tits on a bull. If they won’t lend spontaneously, it is the job of the government to make them lend. Banks have no other raison d’être.
Hear-hear to that last sentiment!
He writes that “the coercive powers of the state” are now required to get the banks to lend to the non-financial sector and to households, and suggests three ways this might be done. All look– from the point of view of the present owners and CEOs of the banks– fairly draconian. (One is the full-scale nationalization of the banks.)
Buiter also explicitly names the position the major banks are taking right now as a “bank lending strike.” He is quite correct to do so. By not lending, the banks are hoping governments will shovel yet more and more money their way, with little or no quid pro quo. They are holding society hostage. Governments must intervene– and not simply by shoveling money to the banks but by getting the economy going with or without the cooperation of the banks, while enacting emergency legislation that will force the banks to cooperate.
I am still very worried indeed that we will see no action of this kind in the US. Bush’s cabinet, Obama and his economic-team-in-waiting, and the Democratic leaders of Congress present and future all seem united– with just a few isolated exceptions in Congress– in being completely in hock to the bankers and their worldview. (What Buiter, back in May, called “cognitive regulatory capture.'” I would call it brainwashing.)
What a pity we don’t have a few more Buiters here in the US.
I have thought for some time, that the right way to do this, is to announce that the government will print a certain amount of additional dollar bills, say 0.1% (I have no idea, 0.1% might be outrageously high) of the money supply. Just print it, blam, there’s a little inflation. Anyone sitting on a pile of cash, just lost 1/1000 of its value. If that doesn’t work, do it again. I think that repeating the exercise 10 times might get the attention of the banks. And just take that money, and plow it into whatever social programs stimulate the economy most effectively (food stamps and unemployment benefits, I think).
Why nationalize the banking system – allegedly this whole mess is due to banks issuing mortgages to people who cant pay the money back. If thats truly the problem the Government should nationalize all mortgages big and small. Take them all away from the banks. Think of what this would mean to the banks not having that huge revenue earner. No more easy bucks. The bansk would have to make smaller loans for other things like business ventures which they would because they need to do something with deposits that generates income. The Govmt then turns around and says to the homeowner – we own your house and here are your new terms. The government actually has the size and power to ensure that ALL mortgages are paid back and they would make a modest return (modest because they would offer lower rates that are affordable).
Thats just my thoughts and I would love to hear what I am missing in my simple solution for a simple problem. I admit I dont know what this would cost but imagine it would be less than the 7 trillion these bailouts are allegedly totalling.
Aside from some brief advisory work Buiter has never once worked in the private sector. You and he have about as much first hand experience in banking.
I know he makes for comfortable reading but you should really vary your diet a bit to include more experienced people.
What happened, by the way, to “the seeking of non-coercive, rights-respecting paths toward the future”??
Now we’re all about “the coercive powers of the state” making people lend even more money to people who shouldn’t be borrowing it in the first place.
But then Willem Buiter said it was a good idea, and he has worked for many governments, so he should know what governments can and cannot do. I had no idea they could re-inflate an asset bubble through compulsory lending. He is a genius. Anyone who hates rich bankers can surely see the wisdom in this.
Mandatory lending now!
That’s why I prefer the money-printing — the banks can choose not to lend, but whatever cash they sit on, gets reduced in value.
No coercion at all :-). The main trick is to print just enough to get investors investing and banks banking, and not much more.
So the Government should be free to print money beyond GDP growth and thus relegate the savings & wages of its (albeit few) prudent citizens to oblivion. Is that the gist of the argument. Ahhh …what’s wrong with this picture, could it be anything such as fairness and justice.
I’m sorry…. I will fight hard to prevent being fodder in this battle.
Helena did not claim more sub prime lending was called for, thats patently ridiculous.
She quites Buiter saying there is a lending strike, where banks have simply stopped lending to force taxpayers through their Governments to end up paying for those loans. The loans you admit that shouldn’t ever have been made. This is all to protect the “free market” that “chose” to do so. Laissez-moi Faire economics and its apparently inevitable profits for capitalist..er “risk takers” and “entrepeneurs”.
Sensible, public good lending is obviously an essential service. When essential services strike the usual counterbalancing response in most countries is to call in the army rather than be held to ransom. I guess yours is busy.
Buiter could be labeled a “government guy” just as others might be labeled “bank guys.” You bank guys could be well advised to stop telling government guys what to do with taxpayer money. Get your teeth out of the nanny state’s apron, she isn’t your wet nurse.
Why not just Nationalise just one bank and let it have an appropriate charter aimed at the public good. Let the free market and consumer choice themselves defeat “laissez-moi faire” economics. Just look what Kiwibank has achieved in the retail sector (we quaintly differentiate here). It was set up by a Government, and all the “bank men” said it would fail in a year.
You bank guys could be well advised to stop telling government guys what to do with taxpayer money.
Guess what Roland — taxpayers aren’t paying for the big bailout. The entire TARP is being funded through treasury auctions. Who do you suppose is buying those treasuries? If you answered “other bank guys” you’re 100% correct!!!! And because treasury yields are so low, net of inflation the cost to service this debt is nothing whatsoever. Still I think we agree that banks shouldn’t get their hands on any public money, and I don’t accept this as an argument that this money entitles the government to seize their assets and force them to lend out money to anyone. Directives like this actually fed the entire housing bubble and subprime problem. We don’t need more government “solutions” like Fannie Mae, tax breaks for investment property, the “Community Redevelopment Act” etc etc.
If you can explain what Buiter means by a “lending strike” you’ll get another prize. There is no “lending strike.” I could walk into any branch of any commercial bank in the US and get a commercial loan tomorrow.
Buiter can indeed be labeled a “government guy” but many other government guys have on-the-job experience in the securities markets Buiter loves to talk about so much. Do you suppose a lifetime academic who makes his living spending tax money might tend to favor “public policy” solutions of the sort he’s used to dishing out? Wasn’t Basel II in fact written by central bankers just like Buiter?
By the way, Buiter was until recently predicting that hyperinflation was the big problem staring us all down. Nowadays, not so much. It must be fun not to be accountable to anyone (not even shareholders.)
don’t know what is the all talking here ……
Why actually government give banks all the money(taxpayer money)
I’m not sure if any mismanaged business (small/large) get or could apply for Gov.monetary rescue….
Is that not true that banks has been mismanaged at large and cause all the world wide drama?
I would not mind to be a banker on 1 mil.per month retainer,sit in oak office and wait till i get xxx bill. of $ to safe my bankrupt doing.
well one thing what Paulson is really excellent in save the BOYS as he is one of them….lucky for him he has Mr.Bush, easy go….here we go….
to the hell with taxpayer who cares,
Vadim, hi. Nice to see you back again with your continued pro-casino-banking tirades.
I’d love to see you answer the simple central question that Buiter and I have been addressing: namely, what are banks FOR? What is their social utility?
Bankers are, after all, only a tiny tiny segment of society (unlike, for example, auto-workers.*) So if the bankers want to justify the truly gigantic amount of taxpayer dollars that they’re getting, they should explain to us in detail what good their work does for the rest of us.
If they are giving loans at reasonable rates to people doing something useful in society, that’s good. Any other use they make of my tax dollars is quite unjustifiable in the present circumstances.
* Re, social utility: I have certainly criticized the product that auto-workers primarily produce, quite a lot. But it does at least provide vitally needed physical mobility to people who– because of the unbelievably poor planning of public transit in the country– often have no other way to do their daily business. So that is a social good (though not efficiently delivered.)
But bankers? If they’re not lending to socially useful projects, what utility does their work have?
“I could walk into any branch of any commercial bank in the US and get a commercial loan tomorrow.”
So everything is OK then?
And the vast amounts of money being thrown at the private, and often recently privatised, lending institutions are unnecessary. Nonexistent, in fact, since they are simply transactions recording the sudden desire of banks to purchase government paper.
And these are big institutions too, the ones, like Citibank, that don’t need public money and aren’t getting it (so that’s alright).
Personally, vadim, I’ll take my chances with Buiter’s analysis, he may work in the public sector but it’s on this planet.
Don
Thank you for your pithy comment.
For those who have speculated on young Mr Bush’s Legacy, it is called the Bush Inflation.
Just as LBJ is remembered for the Johnson Inflation so the sight of people finding $750 Billion not to be enough and so finding another $800 Billion guarantees a place in the textbooks for the guy from Crawford.
This morning just heard UBS top executives would hand back 70.0 million Swiss francs ($59.0 million) in bonuses. as share holder anger with the these ECO how they handle the UBS bank.
Looks to me this step in the right direction as it has some moral in it, to share and hold accountable those in top position for letting this to happen.
Bailout billions all most now ONE trillion US dollar there is no real fact from where this ONE trillions came from and how they will solev the problem with US tope financial guys keep changing their minds how to use this money to solve the problem.
This billions of dollars remind me with those billions donated to Kosovo, Afghanistan and Iraq that US congress approved and some from the foreign donors what we seeing on the ground very small progress but those billions went of either in frauds and shadowed contracts like in Iraq.
For those who have speculated on young Mr Bush’s Legacy
After six years from Iraq invasion with all stories I think is fear to say not Mr Bush only will be hold for what he done in fact we should say US as a nation all what have done.
Mr Bush’s Legacy looks is used to justify their position in any way and not make them self exposed to the accountability of a nation stood behind their president to create what they called Mr Bush’s Legacy.
Mr.Bush Legacy….
Yes it’s know everybody blame Mr.Bush for this and that,everything what went bad,he is like a punching bag…s
I just wonder if there will be any comment about the Trainers of this Match rounds like CHENEY,PEARL,BUSH senior etc etc etc
Helena, my “tirades” are nothing more than a response to your own quite uninformed, patronizing and hostile (in terms of gender, age and race) lectures.
“Casino capitalism” doesn’t have any meaning to me; I feel no real urge to cure someone else’s superstition (and until you have read at least one book explaining the instruments you breezily dismiss as gobbledygook, your opinions will never have more depth than this.)
namely, what are banks FOR? What is their social utility?
Banks don’t exist to meet Willem Buiter’s idea of social utility, or yours, or mine. They’re there to make money, and so long as they don’t intrude on anyone else’s rights, it isn’t my place to coerce their behavior the way you and Buiter would like.
A better question is: what is the social utility of regulators? Why aren’t the “white male” regulators who designed the Basel accords responsible for cratering Europe’s financial sector –Buiter included — being frogmarched to the penal colony along with these nasty ”white male” banker types?
Speaking of white males, how exactly is the Russian or Japanese banking system “north atlantic”? How do these cultural clichés add to our understanding of any social problem?
I assume in wanting to coerce banks to lend more money you feel as if your rights have been violated somehow, but you haven’t told me exactly how. If it’s about “your tax dollars” going to finance all those bailouts, that doesn’t really hold much water since as I noted above the entire TARP is being financed with Treasury bond sales at an effective interest rate of 0 percent. And like you I am against bailing anyone out, especially if it gives career bureaucrats like WB an excuse to seize even more unearned authority.
Helena, my “tirades” are nothing more than a response to your own quite uninformed, patronizing and hostile (in terms of gender, age and race) lectures.
“Casino capitalism” doesn’t have any meaning to me; I feel no real urge to cure someone else’s superstition (and until you have read at least one book explaining the instruments you breezily dismiss as gobbledygook, your opinions will never have more depth than this.)
namely, what are banks FOR? What is their social utility?
Banks don’t exist to meet Willem Buiter’s idea of social utility, or yours, or mine. They’re there to make money, and so long as they don’t intrude on anyone else’s rights, it isn’t my place to coerce their behavior the way you and Buiter would like.
A better question is: what is the social utility of regulators? Why aren’t the “white male” regulators who designed the Basel accords responsible for cratering Europe’s financial sector –Buiter included — being frogmarched to the penal colony along with these nasty ”white male” banker types?
Speaking of white males, how exactly is the Russian or Japanese banking system “north atlantic”? How do these cultural clichés add to our understanding of any social problem?
I assume in wanting to coerce banks to lend more money you feel as if your rights have been violated somehow, but you haven’t told me exactly how. If it’s about “your tax dollars” going to finance all those bailouts, that doesn’t really hold much water since as I noted above the entire TARP is being financed with Treasury bond sales at an effective interest rate of 0 percent. And like you I am against bailing anyone out, especially if it gives career bureaucrats like WB an excuse to seize even more unearned authority.
Vadim, your: Banks don’t exist to meet Willem Buiter’s idea of social utility, or yours, or mine. They’re there to make money, and so long as they don’t intrude on anyone else’s rights, it isn’t my place to coerce their behavior the way you and Buiter would like.
Thanks for this pithy articulation of a pure bankerist viewpoint. Banks are there to “make money.” That’s it? No mention even of any useful service they’re performing on anyone else’s behalf?
Also, they don’t literally “make money” in the sense that the Fed or other central banks do, i.e. by printing and then circulating it. What you mean is they generate income for their managers and (on occasion) their shareholders.
And that is their sole raison d’etre in your view? Why would any non-banker support that mission?
Then, “so long as they don’t intrude on anyone else’s rights…”? Of course they do! In recent weeks, very massively indeed. Because of the banks’ engagement in very risky, casino style betting arrangements, they have caused the western world’s entire system of provision of credit to the productive economy to seize up, causing huge damage throughout the real economy.
If you bankers were only sitting in basements playing poker with your own money I’d say, go ahead (though it would be a waste of time of any real talents or energy that you mioght have.) But you’re not. You’re playing your high-stakes poker with our monetary and financial systems and have dragged them down into the dirt with you.
Also, please cease your patronizing “if you’d read just one book…” line. Fwiw I’ve read more than one book about derivatives, the financial markets in general, etc. They did nothing to answer the basic question of What is it all FOR?
And concretely in the present circumstances, why should the rest of us (non-bankers, non-‘traders’ in the financial markets) feel obligated to perpetuate the lifestyle of these high rollers who took, as it turned out, a whole series of extremely dodgy risks.
Paulson and Bernanke have justified their trillion-dollar no-questions-asked giveaways by saying that the credit markets have ‘seized up’, or that ‘no one will lend’, but I assume that there is an interest rate at which just about anyone can borrow.
I think that another way to say it is that the cost of credit has quite understandably gone up.
Main Street has trouble borrowing because its balance sheet and economic prospects are so dim.
Wall Street has revealed itself to be reckless, insolvent, dishonest, and addicted to low interest rates. The crony capitalists became addicted to subsidized, below-market rates compliments of Greenspan; hence their business model is no longer viable.
If I were going to lend to an addict, I’d want higher rates too.
Vadim must be one special guy–he can walk into any bank in America and get a commercial loan. How can he manage to that when importers can’t get letters of credit and those who do secure them sometimes don’t get them honored.
http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article5192763.ece
Also, banks are not solely in business to make money. If that were true, there would be no need for the Federal Reserve regulation. Instead, the Fed exists in part to achieve the sometimes conflicting goals of maximum employment, stable prices, and moderate long-term interest rates. These are clearly social goals and the role of the Fed is to assure that profit-driven banks to meet their social obligations. Looks like law makers never imagined a bankers’ strike, else the fed would clearly have authority to assure that banks lend money to other banks.
REPEAL THE FEDERAL RESERVE ACT.
Allow the government to lend DIRECTLY to the borrowers. SCREW the banks. They are nothing except parasites sitting between the printing of the money and the borrowing of it.
Pssttt, FYI, banks don’t make money on lending money, banks make their money on buying the money from the fed AT COST OF PRINTING $.01/thousand, and then lending it at usery rates.
Get rid of the charade of the Federal Reserve system, and set up a plausible, just and secure printing to borrowing system.
Why did the Carlyle group buy into Citibank anyway along with the Saudis?
The banks need to be burned to the gorund along with the bankers.
New axiom:
Strangle the last banker with the money clip from the last billionaire.
You know I have worked with 2 vadims in my life, and both were as corrupt as the day is long.
http://video.google.com/videoplay?docid=-515319560256183936
the Fed exists in part to achieve the sometimes conflicting goals of maximum employment, stable prices, and moderate long-term interest rate
JohnH have you ever read the Federal Reserve Act? I challenge you to find any mention of these things anywhere in that statute. In any case, the Fed is not a private bank, and yes private banks exist to make money, not to promote someone’ idea of social justice.
Helena the reason I keep recommending you read a book on derivatives is because you seem to not understand what they’re for, which is transferring risk and discovering prices, not feeding the hungry and clothing the naked, however laudable these other things may be. They’re just tools. A lug wrench doesn’t have a social purpose. People transfer risks using derivatives because if they didn’t they’d be stuck with them, ie they’d be stuck holding some kind of bet they don’t necessarily want.
Derivatives are just like insurance, and no one accuses your insurance provider of “gambling” because it is betting that you won’t die and that your house won’t burn down. If it didn’t make that bet, you’d have to live with that risk yourself.
As far as “western” goes, there’s nothing western about them. hey were actually invented in Japan over 300 years ago.
I take it, Vadim, that you believe the cds market “is transferring risk and discovering prices” in a way that is helpful to the real economy.
Vadim–I took my information directly from Wikipedia. Here’s the link: http://en.wikipedia.org/wiki/Federal_reserve
If you’re so sure of yourself, maybe you should correct wikipedia and all those other economists who repeatedly talk about the fed’s role in stabilizing prices but usually forget to mention full employment, which is the Fed’s mandate to manipulate banks away from their obsession with profits to engaging in social engineering.
Besides the Federal Reserve Act of 1907, Wikipedia lists a dozen other acts which define the mission of the Fed and govern its behavior.
Good luck in your quest to deny that the banking system has no social obligations. It’s simply libertarian wishful thinking.
Vadim–my information about the role of the Fed comes directly from Wikipedia.
http://en.wikipedia.org/wiki/Federal_reserve
If you’re so sure of yourself, maybe you should correct the entry and all the economists who repeatedly refer to the Fed’s obligation to maintain price stability, though somehow they fail to cite the Fed’s obligation to promote stable employment as frequently.
Wikipedia also lists a dozen other laws which together define the Fed’s mission and govern it.
To deny that the banking system has any social obligations is simply wishful libertarian thinking. Banks may do their best to simply maximize profits, but the Fed is there in part to assure that they behave in the public interest.
The Fed is tasked with promoting full employment by the Humphrey-Hawkins Act of 1978.
Derivatives are just like insurance, but the hedgies insisted on calling them ‘swaps’, because if they had admitted that they are insurance, they would have been subject to regulation like insurance.
Watson, most derivatives are exchange traded and more aggressively regulated than insurance (and well more regulated than reinsurance, the insurers of insurers.) The Humphrey Hawkins Act does in fact outline some of the roles for the Fed that JohnH described. It also makes clear that the goal of full employment is to be achieved through private enterprise, not monetary policy. One thing it doesn’t say is that banks themselves bear any of these responsibilities and should be coerced at gunpoint to loan money.
Agog, the “real economy” uses all kinds of derivatives other than CDSes. Without a market for derivatives the real economy would have even more problems than it does now, and risks of all kinds would be absorbed by companies unable to exchange them with those holding naturally counterbalancing risks.
FYI neither Buiter nor any economist of significance is calling for a ban on derivatives trading.
You know I have worked with 2 vadims in my life, and both were as corrupt as the day is long.
I’m sure Helena is “this” close to striking your very offensive comment, since it so clearly violates her commenting guidelines [/sarcasm alert!!!! in keeping with my gambling addiction, I’ll lay odds that Helena will do no such thing.]
While these crises going on day after day baiting hard on more countries and banks and financial agencies.
We saw US big names down, we saw Britten economy suffer made Gorge Browne rush to Gulf Emirates to get help, we saw Germany stand-up and took some action, Japan have come also forward, Swissland the big most respectable banks have problem now.
Its really interesting the silence that one a “democratic” country in this world living for long time on US aides and donation by private donors and from compensations for some courtiers it’s very interesting to know what going on with banks and financial ageneses in that country?
Which Country?
ISRAEL!!
Any one here from JES and other members can tell us how deep and how the level of suffering in Jewish State with recent financial crises from inside that state?
“I have worked with 2 vadims in my life,” but not the present Vadim.
“and both were as corrupt …” These 2 other vadims may indeed have been corrupt, and if so, then there is nothing foul in pointing out the fact. Indeed it is the socially utilitarian thing to do.
“… as the day is long.” It is a fact of life that in childhood, the days seem long. But as one grows older and wiser, the days turn short. Only an immature mind would draw the conclusion that the corruption of the 2 vadims was extreme.
As for the real Vadim, grow up!
“Which Country?
ISRAEL!!”
Isn’t that the country with the reputation for corruption and war crimes as bad as the day is long?
“I have worked with 2 vadims in my life,” but not the present Vadim.
Errr… what exactly do either of these vadims have to do with the present conversation? How is their (or even my) “corruptness” germane to the “financial crisis” which you might notice is the topic of this post?
I’m not interested in brawling with you over Israel or fending off your weak ad hominems. Please take your tantrum elsewhere. The grownups are talking.
Because of the banks’ engagement in very risky, casino style betting arrangements, they have caused the western world’s entire system of provision of credit to the productive economy to seize up, causing huge damage throughout the real economy.
And yet you haven’t been able to articulate any way in which this crisis has hurt you individually. And frankly the provision of credit to the productive economy hasn’t seized up – only to those spheres of the economy so leveraged that a few percentage points means life or death.
So the Government should be free to print money beyond GDP growth and thus relegate the savings & wages of its (albeit few) prudent citizens to oblivion.
Hopefully not oblivion, but actually, yes. What causes deflation and/or depression, is an excess of prudence. Everyone fears bad times, so they cut back on spending and investment, thus making the bad times worse. Merely putting money into the banks does not necessarily work, because the banks, prudently, sit on the cash — it looks like investments made now might not pay well, so they wait. We need a little steady inflation to force people to use their money.
And we cannot fault the banks much for their behavior; they are, in fact, being prudent. It would be a disservice to their investors not to be prudent (stupidly, the US is not a stock-owning investor, because our socialism-allergic Hank Paulson is trading dollars for instruments other than voting stock). The entire point of gently printing money, is to force enough inflation to make it prudent to loan money again.