The Corner

More on the Markets

Here’s a bit from the latest Economist editorial:

If the panic that has choked the arteries of credit across the globe is not calmed soon, the danger will increase that output in rich economies will not simply shrink, but collapse. The same could happen in many emerging markets, especially those that rely on foreign capital. No country or industry would be spared from the equivalent of a global financial heart attack….

The lesson of history is that early, decisive government action can stem the pain and cost of banking crises. In the 1990s Sweden moved to recapitalise its banks quickly and recovered quickly; in Japan, where regulators failed to tackle toxic debt, the slump lasted for most of the decade. The twist is that this credit crisis is deeper (it affects many more types of markets) and broader (many more countries). Any solution has to be both more systemic and more global than before. One country trying to mend one part of its banking system will not work.

Also, this point from the Wall Street Journal is important:

Some in the media — especially the Brits — can’t resist calling these capital injections a “partial nationalization.” Perhaps this is nostalgia for the heyday of Fabian socialism. But while the size of this intervention is unusual, the U.S. has acted to rescue the banking system at other times since the Great Depression. Think of the savings and loan debacle in the late 1980s, as well as the collapse of the oil patch and the failure of Continental Illinois earlier that decade. The government that helped to create the mess has to play a role in cleaning it up.

These interventions are, or at least should be, temporary efforts to stabilize and rebuild the banking system and thus avoid a more costly financial crash. There is always a danger that politicians will want to start allocating credit for their own purposes (see Fannie Mae and Freddie Mac), so it is imperative that governments return any bank shares they accumulate back to private hands once the crisis passes. As bank stocks recover, the taxpayers might even see a profit on their preferred shares.

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