Thursday, February 23, 2012

Wray — Will the Central Bank Bail-Outs Ever End?

To be sure, I do not share the worry of the BIS and many other commentators that the central bank expansions will cause inflation. My worry is this: the “too big to fail” (or as my colleague Bill Black calls them “systemically dangerous”) institutions have learned that no matter what they do, they will be saved and their top management will never be punished.
With the “deal-making” and “bail-out” approaches of the Fed and Treasury, it is unlikely that financial institutions have learned anything from the crisis—except that risky behavior will lead to a bail-out. In the Saving and Loan crisis of the 1980s, many institutions were shut down and resolved, and more than a thousand officers in top management served jail time. In the current crisis, no top officer has been prosecuted, much less jailed. Banks have been slapped on the wrists with some fines—usually without being forced to admit wrong-doing.
Critics like Walker Todd have long argued that continued expansion of government’s “safety net” to protect “too big to fail” institutions not only runs afoul of established legal tradition, but also produces perverse incentives and competitive advantages. The largest institutions enjoy “subsidized” interest rates—their uninsured liabilities have de facto protection because of the way the government (Fed, FDIC, OCC, and Treasury) props them up, eliminating risk of default on their liabilities (usually only stockholders lose). The “deal-making” approach described last week extended the principle of lender of last resort activities to entirely novel areas—protecting creditors of even shadow banks and, as discussed, favoring bond holders while forcing stockholders and securities holders (and defrauded homeowners) to take losses.  As William Black argues, these SDIs are mostly run as “control frauds” to enrich top management. As long as they remain in business they destroy economic value—not just the capital value of the firm, but the financial and real wealth of the economy as a whole. Total financial losses that can be attributed to the GFC already exceed $10 trillion and will eventually sum to much more. And of course that does not include the “real” economic losses—nearly 10 million jobs in the US alone.
Read it at Economonitor | Great Leap Forward
Will the Central Bank Bail-Outs Ever End?
by L. Randall Wray


Bob said...

I have a 50 trillion dollar bill Zimbabwe in a frame on my wall.

Never say never

Tom Hickey said...

Bob, no one here ever said "never" since never is open-ended. Will America fade in the future like other empires. Of course, even though we cannot imagine it now. Will it be sooner or later? How to evaluate the risk?

The question is whether some such scenario imminent enough to act on. As Matt said, "Put a clock on it." Otherwise, you arene't really claiming anything relevant at all. Why would someone factor in a very low probability in assessing opportunity cost in the choice of alternatives?