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Ireland forces Europe, Europe forces the United States
Is this a race to the top or a race to the bottom?
“The Europeans not only provided a blueprint, but forced our hand,” said Kenneth S. Rogoff, a professor of economics at Harvard and an adviser to John McCain, the Republican presidential nominee. “We’re trying to prevent wholesale carnage in the financial system.”
Here is much more on today's events. In the current version of globalization the equilibrium seems to be that non-guaranteed banking systems are swiftly penalized and turned into zombies. This suggests, by the way, that undoing current bank guarantees, when recovery comes, won't be as easy as we might have thought.
Addendum: Here are the opinions of many economists.
Posted by Tyler Cowen on October 14, 2008 at 10:25 AM in Political Science | Permalink
Comments
It will be impossible to undo them.
Posted by: Yancey Ward at Oct 14, 2008 10:30:27 AM
Tyler,
The Gadarene rush to "safety" of a panic only occurs when investors lose their sense of proportion. Getting out of panic stations Government guarantees will prove quite easy with a mixture of sunset clauses and salami tactics. The market will discount the changes at spreads which will prove to be close to but below the premia which Treasuries will impose on the banks for the continuance of the guarantees.
Posted by: David Heigham at Oct 14, 2008 10:35:53 AM
A Hail Mary pass into an empty endzone.
There's a good reason why governments didn't attempt this before: because they knew it was beyond their capability. What happens in a few months when the whole world has its "Iceland moment", near-simultaneously?
Posted by: at Oct 14, 2008 10:46:08 AM
Clearly correct--the equilibrium level of guarantees is set by the player willing to offer the maximum. Questions: Do the lending guarantees and equity injections interact in some complementary way? Or could the guarantees alone do it? And are the warrants "hogwash" as a commenter elsewhere claimed, designed to give cover to the fact that Paulson's banker friends wanted to avoid granting voting stock to the Treasury?
Posted by: RS at Oct 14, 2008 10:50:05 AM
Revolutionary steps toward a much better world.
Posted by: offshore at Oct 14, 2008 10:57:11 AM
Thankfully there is some attempt at coordinated action. This isn't quite a prisoner's dilemma scenario.
Posted by: mk at Oct 14, 2008 11:05:51 AM
I keep reading that smaller banks that didn't plunge headfirst into the MBS market are doing fine.
Why don't we capitalize them first?
Also, I would prefer if the government would directly capitalize loans over a certain threshold, cutting out the heretofore irresponsible middle men.
Posted by: meter at Oct 14, 2008 11:20:31 AM
I second meter's first question. Aren't there any healthy banks? Why can't they gang up on, kill and scavenge the weakened big banks? And why couldn't we support that process? I suppose that would be more disruptive...
Posted by: mk at Oct 14, 2008 12:20:02 PM
Re capitalizing loans directly, that doesn't sound practical. There's a reason the middlemen are there, and the government would probably be fairly bad at taking over that role. It would be interesting to see more money go into the Small Business Administration, however.
Handouts are always difficult to take back. However, it does happen. You either have to do it when times are so good no one cares anyway, or when times are so bad that everyone's panicked and willing to make an exception to the usual log-rolling. Too bad Congress didn't try harder to roll back farm subsidies in the face of rising food costs. Sigh.
Posted by: Greg at Oct 14, 2008 12:24:36 PM
I contend that any guarantee is an insurance against "lemon" banks. It would be less costly and more transparent to invite banks to disclose their balance sheets so that lemons, even if big, fail...How can we continue to invest in banks without knowing exactly what the balance sheet is made of. It's a black hole...
Posted by: Massimo GIANNINI at Oct 14, 2008 12:37:23 PM
"Why can't [the small banks] gang up on, kill and scavenge the weakened big
banks?"
It seems to me that the problem for the small banks resembles the problems
of the big banks. How do you know that the bank you are about to kill and
scavenge isn't poisoned? Chewing on the wrong bones could make you very ill...
Posted by: Jarndyce at Oct 14, 2008 12:50:52 PM
It appears certain bankers and buy out/equity firms are eliminating their competition, thus, creating a "legal monopoly" for the few that will control the world's money system.
If you believe the Bible is the written word of God, then you also know there will eventually be 10 controlling nations. The bankers are forcing out their competition, which in turn, causes nations to go bankrupt, which in turn, forces nations to join unions.
It's a very simple strategy that is working very well.
Posted by: SharkGirl at Oct 14, 2008 1:15:59 PM
When did "we" think it would be easy?
Posted by: liberty at Oct 14, 2008 1:43:27 PM
The popular belief here in Ireland is that Ireland actions were heavily influenced by a popular talk radio show. The Joe Duffy show had a number of callers who talked about removing all their money from the banks. The minister for finance phoned the program to warn it was acting irresponsibly. Shortly afterward the same minister issued the guarantee on all bank deposits.
Now serious commentators may look at external pressures on the Irish banking system but it is an odd thought that the Joe Duffy show may have altered the future course of the world economy
>https://www.timesonline.co.uk/tol/news/world/ireland/article4795354.ece
>http://www.independent.ie/business/media/lenihan-lash-at-joe-duffy-banks-panic-1479358.html
Posted by: at Oct 14, 2008 1:46:54 PM
If you believe the Bible is the written word of God and you are an idiot with no reading comprehension ability, then you also know there will eventually be 10 controlling nations.
There, fixed it for you.
Posted by: Bob Montgomery at Oct 14, 2008 1:47:11 PM
Ireland forces Europe, Europe forces the United States
How the Irish saved/destroyed civilization/capitalism. [strike out as appropriate]
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