Emerging-market crises are marked by an increase in tunneling—i.e., borderline- legal/illegal smuggling of value out of businesses. As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves. Boris Fyodorov, the late Russian Minister of Finance who struggled […]
Having lived through the Swedish banking crisis in the 1990s, I am struck by how poorly the American public understands what really was a successful cure that remains relevant to the current situation. In fact, the Swedish example would probably provide the best, most capitalist, solution for the United States. All indications are that the […]
The US Treasury reportedly will begin strict examinations of the 20 biggest American banks’ balance sheets starting this week. If anything close to current asset values are used to evaluate those books, and they should be, many of these banks will need public capital injections or closure. The reluctance to pull the trigger appears to […]
At the end of the third week of February, Senators Dodd and Schumer signaled that financial elite solidarity had broken; “nationalization” is no longer taboo. The consensus is dead (check with Barney Frank), crazy ideas abound, and long live what new policy approach? Here are five sets of issues to guide your viewing the week […]
The prevailing consensus on any economic policy is a fascinating beast. For years it can stay put, seemingly immovable, and even in some cases become enshrined in legislation or central bank statutes. One day it begins to shake ever so slightly; under the pressure of events a wider range of serious opinion develops. And then, […]
The time-honored principle of public sector intervention to support banks is that of Walter Bagehot, who wrote in 1873 that the central bank should provide lender of last resort (LLR) lending to solvent banks in a panic, but should not lend to insolvent banks. However, because of the too-big-to-fail effect in which failures of large […]
The United States government has now announced its plan to inject capital into the nation’s banking system, in parallel to similar recent actions in Europe. Although the press has reported the plan will "partly nationalize the nine major banks" (Washington Post), there will not be much nationalization at all in a meaningful sense of the word. The early signs are that this action can restore confidence, whereas the announcement of TARP’s (Troubled Asset Relief Program) purchase plan had failed to do so. The stock price surge on Monday (October 13, 2008), the fifth largest on record, reflected anticipation of a government plan to recapitalize banks and announcement of forceful similar measures in Europe. However, fundamental constraints on the capacity of the financial sector to expand credit seem likely to remain for some time.