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We could be reaching a new form of banking crisis.
It’s the sort where not only are governments and central banks increasingly unable to keep financial firms propped up, but in some cases are unwilling to do even what is possible–or at least to do it on the same favorable terms bankers have taken for granted.
Ireland’s disastrous rescue of its banking sector, which both failed to rescue its banks and also dragged the rest of the economy down with them, remains a warning to governments around the world.
But in some cases, the governments themselves are weakening their banking sectors. Greek banks, for instance, are as exposed to Greek sovereign debt as the rest of Europe combined. The economic case for a Greek bailout is considerable, but politically it is increasingly a non-starter.
German Chancellor Angela Merkel’s party suffered yet another poll loss at the weekend, this time in her home state, as voters turned against sovereign bailouts.
Without rescue funds, a Greek default would cause the collapse of the Greek banking sector and serious weakness across the rest of the single currency’s financial system. And that’s without considering second and third-round effects of such a default.
The banks would need yet another rescue.
Of course, central banks could print money and use that to replace banks’ lost capital. But bankers’ responses to the 2008-2009 rescues didn’t bolster their case for future intervention. By paying themselves huge bonuses and salaries from the vast social transfers made to them–either through direct capital infusions, liquidity interventions or through very low interest rates–bankers more or less abandoned their claims to future rescues.
Any politician sanctioning a central-bank effort to rebuild banks on the same basis would lose his job. Any central bank ignoring the political repercussions runs the risk of losing its independence.
Popular anger with banks, and their undeserving rich, is being played out. Punitive taxes are being considered. In Europe, that takes the form of direct levies on the banks or talk about wealth taxes. In the U.S., the redistribution is, in the first instance, likely to go through the courts–the U.S. government is suing 17 big international banks to recover something like $200 billion in mortgage-related losses.
The more politicians start to believe former Federal Reserve Chairman Paul Volcker’s adage that the only contribution the banking industry has made to society in the past 20 years is the automated teller machine, the more the non-utility parts of the industry will be squeezed.
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Banks don’t pay levies – their customers and shareholders do. The banks are in thrall to the politicians via the central banks and generally dance to their masters tune. At times it becomes very convenient for the policy makers to demonize the banks but ultimately these are the clearing houses for a nation’s savings and play a very important part in the economy. The fate of the modern economy is very much tied to the success or failure of the banks and politicians should keep this in mind even when trying to distance themselves from their policy disasters.
“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth … to provide men with buying power. … Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. … The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”.
The term supply-side economics has taken on a variety of meanings over the past quarter-century. In the 1970s, it referred to efforts to model the supply side of the economy as an adjunct to Keynesian analysis of the demand side. That line of reasoning, exemplified by the stagflation model developed by Michael Bruno and Jeffrey Sachs (1981, 1985), was influential in the Fund and was reflected in the WEO and other studies as well as in the Fund's policy advice and conditionality. In the 1980s, the term was hijacked by tax-cut advocates who argued either that lowering tax rates would raise tax revenues by stimulating economic activity (Canto, Joines, and Laffer, 1983) or that a shift from taxes to deficit financing would have no real effects ("Ricardian equivalence"; Barro, 1974). By the 1990s, it had branched out to encompass advocates of low interest rates and monetary expansion, on the grounds that inflation would be held in check by productivity growth stimulated by easy money (e.g., Kemp, 2001). These radical views never took hold in the Fund.
Gotta hand it to you, nice “leach” onto my handle, but your argument doesn’t fly! In America, the Corporate Tax rate and money repatriation rate is one of the highest in the industrialized world. Even Canada has a much lower rate! It’s no wonder that there is over 2 Trillion Dollars of American Corporate money sitting overseas and not being used to help our economy. Further, what has destroyed our “buying Power” is the mindless printing of money by the fed, to offset our debts and obligations around the world. Since Obama took office, everything from the price of a gallon of milk to a gallon of gas, has risen by at least 25% or more, and it’s because of the mindless printing of unsecured dollars and the inflation it has unleashed on us!
Wow are you misinformed! The decrease in taxes and the arbitrage of capital has led to decreased wages for “real” work, resulting in less “buying” power for the productive class and the spiraling of deficits throughout the world. Didn’t you know deficits don’t matter per Thatcher and Reagon a bastardization of Supply side economics. Do a little research and get on the right side of history!!!
The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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