A little less conversation, a little more action please

It is time for Ministers of Finance, Chancellors of the Exchequer and Secretaries of the Treasury to act to recapitalise the tottering banking systems of the North Atlantic region.  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 to implement 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.  An immediate capital injection into all UK banks, through ordinary equity or through preference shares with upside for the tax payer through warrants is possible right now without need for new legislation.  My preferred option of a mandatory debt-to-equity conversion for the banks either has to wait till the banks go formally into administration (bankruptcy procedures) or till a new special resolution regime for banks, with prompt corrective action, finally becomes law.

Iceland has just nationalised the second of its three large (formerly) internationally active banks, substituting the risk of government insolvency for that of private bank insolvency.   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.

Partial nationalisation of the UK banking sector 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.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website