By Barry Ritholtz - November 10th, 2011
Over these past few years of watching Banks collapse, get bailed out, and then falter again, I have had a consistent take on the matter: The banking system is more important than any single institution; If you as a banker are so incompetent as to blow up yourself and your firm, you should not be saved; instead, prepackaged bankruptcy, a/k/a temporary nationalization, is the preferred route to protect the overall system.
The choices are stark: Emulate either Japan or Sweden. In the US, we have a hybrid (Perhaps we should call it Swedenese or Jaden).
The Swedish approach — Save the System! –is embodied in the FDIC, which has real dollars at risk as the insurer of depository accounts. They follow the Swedish model in that banks they determine to be insolvent are to be liquidated and or sold off top the highest qualified bidder.
The Japanese approach — Save the Banks! — is a result of their Keiretsu, and is the model embraced first by the Bush White House, and the Federal Reserve, than by Congress, and lastly by the Obama White House. I have argued this approach is in large part why the post-crisis economy has been so moribund, with sub-par GDP and Employment the rule.
This policy-making error is based on a refusal to take the loss. Indeed, Capitalism recognizes that failure is normal, and denying that, rejecting a fundamental premise of market based economies equals embracing socialized losses caused by the reckless. The approach of Socialism for bankers, Capitalism for everyone else is a philosophy that Keynes, Hayek and Friedman would all heartily reject en masse.
As the error or our (and the Japanese) ways becomes increasingly obvious to fair-minded observers, the Swedish approach continues to find new adherents. The latest is this piece in Bloomberg Business Week:
“Sweden’s bank rescue model has protected taxpayers, turned a profit and left the Nordic country less indebted than when the financial crisis started in 2007.
It’s the opposite of what’s happening in the U.K., where the government’s debt burden has doubled in the past four years and taxpayers are still footing the bill to bail out banks . . .
As lenders across the globe resist stricter regulatory controls they say will hurt earnings, Sweden’s commitment to enforcing rigorous standards has paid off. Companies like Stockholm-based Nordea Bank AB (NDA) are better capitalized than most of their European and U.S. rivals, and have better access to funding markets and a lower risk of default. Tougher controls enacted during the Swedish banking crisis of the 1990s also have protected the state budget, which will be in surplus this year.”
We are presented with a stark simple choice when confronted with a financial collapse. We can save the system or we can save individual banks. Astonishingly, we keep choosing wrongly . . .