Google Reader highlight #2: Willem Buiter on the financial crisis

This is my second pick of current highlights from my Google Reader.
Buiter is the former chief economist of the European Bank for Reconstruction and Development, currently Professor of European Political Economy at LSE. This week, the Economist described him as “an honorary Brit.” (Not clear whether that was meant as a compliment?)
Anyway, I have found Buiter’s Maverecon blog, published by the Financial Times really helpful and informative in recent weeks. (Along with, I should say, Calculated Risk, a person with excellent judgment for what’s important in breaking financial news, and a good clear way of presenting it. They cover slightly different slices of the action: while CR looks more at breaking news most of Buiter’s posts are written with a broader, though still extremely timely, purview.)
So here’s what we have from Buiter yesterday and today: “Don’t worry: We can always lease Heathrow to the Russians”. It’s a short but I’d say classic post, which reads in its entirety:

The government of Iceland is using the threat of a €4 bn loan from Russia in exchange for a 99-year lease on the airport at Keflavik – a former American air base – as leverage to obtain financial support from the West. This is high-stakes poker -not without risk to Iceland, if their bluff is called. I would have securitised the future revenues from hydro and geo-thermal power generation before bringing on the Red Army. It does show, however, that there may be more collateralisable assets around for governments to draw on that one might have thought. Good news for Chancellor Darling.

In this post, published 45 minutes earlier, Buiter bemoaned the inability of the finance ministers of “the North Atlantic region” to fashion a workable and coordinated response to the still unfolding crisis:

Statements that “we shall do whatever it takes to safeguard the banking system of (fill in name of country)” don’t cut it any more. The banks with border-crossing activities in the US, the UK and continental Europe are now all at risk of failing. They are all cutting back drastically on their lending to the real economy. Official dithering is exacting a growing price, to be paid by tax payers and the future unemployed.
The European Union thus far has been an utter paper tiger. The agreement on a €30bn fund to help SMEs is almost worst than nothing, because it draws attention to what was not achieved. There has been no agreement to restrict beggar-thy-neigbour (and shoot-your-own-tax-payer-in the-foot) extensions of guarantees on bank liabilities. There has been no agreement on sharing rules for the fiscal burdens associated with recapitalisations of the 44 or so European financial institutions with significant border-crossing activities. There has been no decision so implement a full information sharing between national regulators and central banks (including the ECB) for these same border-crossing financial institutions. There has been no agreement on common principles for national TARPs, to prevent large-scale border-crossing dumping of toxic assets in whatever jurisdiction offers the best terms.
The UK authorities are limping after the widening and deepening crisis, falling steadily further behind…

His preferred policy, for the UK, is a partial nationalization of the banks, which he argues,

would transform the high and growing risk of private bank insolvency for a low and manageable risk of UK sovereign insolvency. The UK government is capable of the domestic fiscal transfer required to back up the partial nationalisation. With the right policies, UK Ltd (households and businesses) would be able to generate the increased external primary surpluses necessary to effect the external transfer required to make a partial nationalisation credible. It would be a good trade for the UK tax payer and for all those trying to make a living in this country.

He also notes that the UK is in a better position to make some form of a bank-nationalization move work than is Iceland, which has just implemented one: “The UK has a smaller internationally exposed financial sector relative to its GDP than Iceland (UK gross external assets and liabilities are around 450 percent of annual GDP rather than just under 900 percent) and its tax base is much larger and much diversified than Iceland’s.”
This post, published late last night London time, was titled “A Special Resolution Regime for banks must put tax payers before shareholders and bank creditors” It starts out with these very sobering words:

It’s reasonable to assume that the banking system in the North Atlantic region is insolvent and would be bankrupt but for the reality of recent government bailouts and the expectation of future government bailouts. Certainly, for the system as a whole, the marked-to-market value of its assets is way below that of its liabilities. I strongly suspect that even the hold-to-maturity value of its assets is well below that of its liabilities. Although the system as a whole is broke, there are no doubt individual banks that are solvent. We may not, however be certain as to which banks are solvent and which banks are not.
I also take it is given that it is desirable – essential even – to preserve the core of the banking system and to keep it operating without interruption, because it fulfills an essential role in the intermediation of funds between financial surplus units and financial deficit units – a role for which no substitute can be found or created in the short and medium term. The bulk of the banking system therefore needs to be bailed out…
The main remaining question then becomes who will pay for the bail out, the tax payers or the existing creditors of the banks (including the shareholders and other providers of equity). I have a strong preference for putting much of the cost of a bailout on the existing creditors. This is in part for reasons of equity and fairness: the existing creditors made bad investments/loans; they ought to pay for their failures. They earned a risk premium while the going was good. They ought to eat the risk when it materialises. It is also for incentive reasons. Future lending to banks and future purchases of bank obligations will be undertaken with a better appreciation of the credit risk involved. Another massive over-expansion of the banking sector will be less likely…

This sounds like excellent good sense to me.
What I like about Buiter is (1) The fact that he evidently speaks from such broad experience as a special kind of banking practitioner, and (2) That he also speaks from what feels like a very broad and humanistic understanding of economics and finance.
I also like his tagging the problem economies as “North Atlantic” economies… H’mmm, where have a heard that term used in a different context in recent years?
It is very notable to me that the leaders and “Titans” in all these ultra-free-market systems who for years now have been shucking off (or actively subverting) regulation by governments and lobbying hard to destroy mechanisms of social security, welfare safety nets, etc, are now making a mad rush for the public feeding trough themselves. The terms on which we, the rest of the citizenry, allow them to continue to play any kind of a role in our countries’ economies should be determined by us, not them.
Which is what Buiter was broadly arguing there….
I am not as sure as he is, though, that it is “essential” to preserve “the core of the banking system.” Well, it all depends what we mean by “core.” Some form of banking system, yes. But a banking system that encourages speculation, usury, and the development of arcane financial instruments and “derivatives” that grow literally like a cancer on the body of the real economy of goods and productive (non-financial) services? I don’t think so.