Recapitalising banks

By Roger E. A. Farmer

We don’t need to nationalise the banks. We don’t need to guarantee bad assets. We don’t need government to own voting shares in private banks. We don’t need to create a bad bank full of toxic assets. We just need a little faith in free markets and a little creative intervention. I propose that the central bank should support the price of an indexed fund of bank stocks. Read more

Is the British government on the right path with its recent package of measures to help the banking sector or, as Mervyn King, governor of the Bank of England, put it this week, “to protect the economy from the banks”? The question, in truth, is not only whether the measures will work, but whether the UK can afford them.

Here are two frightening statistics: over the past five years, the balance sheets of many of the world’s largest banks more than doubled; and, according to the Bank, the median ratio of debt to equity in big UK banks is more than 30 to one. Read more

By Niall Ferguson

In the Old Testament Book of Leviticus, God commands the children of Israel to observe a jubilee every 50 years. Nowadays we tend to associate the word with celebrations of royal anniversaries such as Queen Elizabeth’s golden jubilee in 2002. But the biblical conception of a jubilee was more precise: that of a general cancellation of debts. Read more

By George Magnus

After the Minsky Moment – where euphoria tips into crisis, named after Hyman Minsky – the capitulation of economic activity has been rapid and severe. The outlook is as dark as the doomsayers assert. The only thing that stands between today’s dire economic prospects and a lost decade similar to Japan’s in the 1990s is the competence and authority of macroeconomic policy. We have a long way to go, but for five reasons, even doomsayers can start to feel the force, so to speak. Read more

By Michael Pomerleano

For a long time after the crisis started, the silence of the policy making community was deafening. When the response finally came, it was reactive. Read more

By Laurence Kotlikoff and Perry Mehrling

As we advocated two months back (Bagehot plus RFC: The Right Financial Fix), Uncle Sam is finally starting to sell systematic risk insurance on high-grade securities in exchange for preferred stock. This is a critical function for the US government; Uncle Sam is the only player capable of hedging systemic risk because he’s the only player capable of taking actions that keep the overall economic system on the right course. Read more

By Michael Spence

The crisis we are now in globally had its origins in an asset bubble fuelled by the interaction of excessive leverage and a widespread underestimation of the endogenously rising systemic risk – roughly the degree to which individual risks were becoming highly correlated via balance sheet linkages.  The potential seriousness went unnoticed or not fully understood (by market participants, regulators and commentators) for several years. Read more