Bank of England

James Mackintosh

There’s been a sudden spate of rather good poems about the financial crisis, started by Giles Wilkes at Freethinking Economist. Some extracts:

Wilkes on QE:

Both the Chancellor’s mighty eyebrows took a leap towards the ceiling
The money flooding out gave him that ‘Denis Healey’ feeling
“Infla…” he checked himself. “Guv’nor, I’m rather disappointed”
“To inflate away our troubles wasn’t why you were annointed”
But the Guv’nor mollified with words like “money multiply”
till the Chancellor signed the letter with a wary, weary sigh.

James Mackintosh

Barack Obama is finally taking on Wall Street, apparently prompted to action by the voters of Massachusetts. But he’s taking the wrong approach.

There are hundreds of competing ideas on how to stop the banks needing trillion-dollar bail-outs. Obama has chosen three, but they are the wrong three:

1. No proprietary trading
2. No owning or “sponsoring” hedge funds or private equity
3. A cap on size for deposit-taking banks

This is not to defend the banks: they made some stupid decisions, helped out by an unending appetite for cheap debt from consumers and a global debt bubble created by China’s surplus, America’s over-consumption and Alan Greenspan’s Federal Reserve. It is right that the banks should be reformed, to prevent future bail-outs.

But these actions fail to get to the root of the problem. The banks had acted just like any other borrower when presented with cheap debt (and dumb regulators): they borrowed as much as they could (often leaving them an astonishing 50 times geared), and found ways to use it from which they thought they could make money. Lenders to the (big) banks exercised no control, because they thought – correctly – that they would be bailed out if the banks failed.

The best way to fix this problem is to find a way to allow the banks to fail. If this can be put in place, the market will itself control the banks, by increasing their cost of borrowing when they take bigger risks (more transparency may be required). If investors fail to control the banks they invest in, the bank can be left to go bankrupt – as smaller banks already do. Bondholders would lose the bulk of their money, as their bonds convert into equity, either by making all (or perhaps just most) bonds explicitly convertible, or through laws requiring conversion if a bank fails.

FT dot comment

FT dot comment is no longer updated but it remains open as an archive.

Politics, economics, high finance and morality – this blog addresses the issues being considered by the FT’s comment team, and their thoughts.

FT dot comment: a guide

Christopher Cook is an FT editorial writer. Before joining the FT in 2008 as a Peter Martin Fellow, he worked for three years for the Conservative party.

Lorien Kite is deputy comment editor, a post he took up in 2009 after four years as a commissioning editor on the analysis page. He joined the FT in 2000.

Ian Holdsworth became assistant features editor in 2009 and was previously chief production journalist for the features pages.


Joining the debate: To comment, please register with FT.com. Register for free here. Please also read the FT's comments policy here.
Contact: You can write to the comment team using this email format: firstname.surname@ft.com
Time: UK time is shown on our posts.
Follow the blog: Links to the Twitter and RSS feeds are at the top of the blog.
FT blogs: See the full range of the FT's blogs here.