Monday, September 15, 2008

Calm Down Dear


Pumped up disaster

Argggh!!!

Run for your lives!!!

Every man for himself!!!

To listen to the TV and radio reports overnight, you'd think the end of the world had finally pitched up.

Hmm. Before selling up and climbing aboard the ark, let's just take a moment to reflect on motivation. We all enjoy a good disaster story, sure. But this story is being fueled by a couple of other key factors.

For one thing, the lib media loves the idea of Biblical damnation for those evil overpaid bankers. They are positively slavering for the Day of Judgement, in which the righteous will be vindicated, and the enemies of the Lord will be vanquished in a blizzard of new rules and regulation (not least over their PA moolah). No wonder they're talking it up.

Second, the bankers want immediate further cuts in interest rates and more taxpayer bail-outs. No wonder they're talking it up. Except of course, they don't want to frighten us punters into another bank run, so they talk up the problem in private, to central bankers, politicos, and excitable journos.

Clearly, when a bank like Lehman goes bust, the pain is real enough. Shareholders and employees take a real hit. But that happens when any company goes down, and these days we don't bail them out.

Of course, as we keep being told, banks are different. They are central to the operation of our economy, they are interconnected in mysterious and potentially dangerous ways, and they hold vast amounts of our savings. So when they hit the wall, taxpayers have to step in or risk eternal damnation.

Our old friend Prof Buiter has a much more balanced take. He asks "What if Lehman files for bankruptcy and nothing much happens?", and says:

"If an investment bank is like any other business with a comparable value added, and if the size of an institution’s balance sheet, or the magnitude of its exposure in the contingent claims markets, are not the right metrics for the damage to the financial intermediation process and to the real economy that would be caused by the bankruptcy of the institution, then there is no argument for tax payer support for Bear Stearns, Lehman or any other (investment) bank. Or at any rate, no stronger argument than for the tax payer to support US automobile manufacturers, steel manufacturers or manufacturers of garden gnomes threatened with bankruptcy...

I am optimistic that investment banks will turn out to be more like normal businesses than like the negative-externalities-on-steroids painted by the Fed and the Treasury during the Bear Stearns rescue."

In truth, we don't really know how this will pan out. But what the Prof is telling us is that taxpayers should not allow themselves to get panicked at the first smell of sulphur.

Yes, it's dramatic, but Lehman's demise is hardly unexpected, and our hunch is that we'll somehow muddle through. As the Today's City interviewees said this morning (much to Humphrys' disappointment), the most likely outcome is that credit will become a bit scarcer, the economy will slow even more, and longer term there will be more bank regulation (maybe a formal split between retail and investment banking).

But the end of the world it ain't.

PS More to the point, WTF has happened to the Brown/Darling "plan" for an enhanced depositor protection and a special resolution regime for busted banks? We blogged its first appearance nearly 9 months ago, and although there've been various mumblings since then, so far as we know, it still isn't enacted. A sense of urgency, it ain't.

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