Interesting editorial in The Economist published in El Comercio . The coming years should be years of study on who were the culprits (banks, consumers, regulators, etc.), How to avoid falling back into these situations, what the sanctions to take against the culprits, the cost overall crisis management. (...)
WITHOUT SUPPORT CENTER
Therefore, governments will be the only buyers in the environment [of bad assets from financial companies in trouble]. If necessary, they should create a special fund to manage and dispose of bad assets. But do not underestimate the cost of the bailouts, even those that are needed. Nobody wanted to buy Lehman unless the Government offered the type of warranty provided JPMorgan Chase to rescue Bear Stearns. The nationalization was gone for good reasons that the shareholders of both Fannie and Freddie have become much more risky for other investors to put fresh capital into troubled banks. The only recapitalization prudent under the circumstances is a total purchase, preferably by a commercial bank backed by deposits, which are insured by the Government, as did Bank of America and Merrill Lynch, Lloyds and HBOS and, possibly, Wachovia with Morgan Stanley. The bigger the bank, the more difficult the operation. But each rescue encourages investors to be reckless and do not worry about the solvency of those with whom it negotiates. And therefore, encourages future excesses.
Despite all it costs the rescue of an institution, the cost to the economy of a bankruptcy can sometimes be higher. If finance shrinks, credit will be sucked out of the economy and bad credit people can not buy houses, run companies or investing in your future. So far the U.S. economy has remained. Hope is that the housing slump is coming to an end and that countries like China and India will continue to thrive. Recent declines in the price of oil and other commodities give central banks scope to cut interest rates, as China did this week.
But there is also a dark side. U.S. Unemployment increased to 6.1% in August and is likely to rise further. Industrial production fell 1.1% last month, and annual variation in retail sales is the weakest since the aftermath of the 2001 recession. Production is falling in Japan, Germany, Spain and Britain, and is barely positive in other countries. The prices of houses in the middle of the 20 countries making up the index property of "The Economist" also are falling. Currencies, stocks and bonds of emerging economies have also been abused, as investors no longer believe that these achievements separated from the problems of rich countries.
Unless the economic policy makers unforgivable mistakes, like leaving institutions falling systemic risk or keep monetary policy too tight, there would be no reason for the misery of today will become a new 'great depression'. A long-term concern will be the inevitable tendency to try regulate modern finance into submission completely. Although understandable, this desire is wrong and dangerous, and the colossal success of commerce in emerging countries shows us all what you might lose it. Finance is the brain of the economy. Despite all its excesses, they allocate resources where they are most productive, in a vastly more efficient than any central planner.
Regulation is necessary and there are some improvements to the financial sector. However, the regulation must be right: to end the fragmentation in the monitoring system in the U.S., more transparent, flexible capital requirements to offset booms and busts; supervision of giants like AIG are too large and interconnected to fail; accounting that values \u200b\u200brisks better, markets and clearing houses to make sure and clear derivatives.
All this would count as progress. But a naive faith in the power of regulators creates ruinous false security. Financiers know more than regulators and that they have more weight when growth. Banks can take advantage of the inevitable blind spots of regulation, such as hiding assets off their balance sheets or use insurance as providing AIG, which allowed them to increase their profits by reducing the capital required by the regulator. It is no coincidence that both schemes are at the heart of the current crisis.
This is a black week. Those of us who support financial capitalism are open to the charge that the system, which we have argued, has simply served for some crooks to get rich. However, financial capitalism helped produce healthy economic growth and low inflation for a generation. It would take a brutal recession to cancel all those achievements. Do not forget that in the debate ahead.
Despite all it costs the rescue of an institution, the cost to the economy of a bankruptcy can sometimes be higher. If finance shrinks, credit will be sucked out of the economy and bad credit people can not buy houses, run companies or investing in your future. So far the U.S. economy has remained. Hope is that the housing slump is coming to an end and that countries like China and India will continue to thrive. Recent declines in the price of oil and other commodities give central banks scope to cut interest rates, as China did this week.
But there is also a dark side. U.S. Unemployment increased to 6.1% in August and is likely to rise further. Industrial production fell 1.1% last month, and annual variation in retail sales is the weakest since the aftermath of the 2001 recession. Production is falling in Japan, Germany, Spain and Britain, and is barely positive in other countries. The prices of houses in the middle of the 20 countries making up the index property of "The Economist" also are falling. Currencies, stocks and bonds of emerging economies have also been abused, as investors no longer believe that these achievements separated from the problems of rich countries.
Unless the economic policy makers unforgivable mistakes, like leaving institutions falling systemic risk or keep monetary policy too tight, there would be no reason for the misery of today will become a new 'great depression'. A long-term concern will be the inevitable tendency to try regulate modern finance into submission completely. Although understandable, this desire is wrong and dangerous, and the colossal success of commerce in emerging countries shows us all what you might lose it. Finance is the brain of the economy. Despite all its excesses, they allocate resources where they are most productive, in a vastly more efficient than any central planner.
Regulation is necessary and there are some improvements to the financial sector. However, the regulation must be right: to end the fragmentation in the monitoring system in the U.S., more transparent, flexible capital requirements to offset booms and busts; supervision of giants like AIG are too large and interconnected to fail; accounting that values \u200b\u200brisks better, markets and clearing houses to make sure and clear derivatives.
All this would count as progress. But a naive faith in the power of regulators creates ruinous false security. Financiers know more than regulators and that they have more weight when growth. Banks can take advantage of the inevitable blind spots of regulation, such as hiding assets off their balance sheets or use insurance as providing AIG, which allowed them to increase their profits by reducing the capital required by the regulator. It is no coincidence that both schemes are at the heart of the current crisis.
This is a black week. Those of us who support financial capitalism are open to the charge that the system, which we have argued, has simply served for some crooks to get rich. However, financial capitalism helped produce healthy economic growth and low inflation for a generation. It would take a brutal recession to cancel all those achievements. Do not forget that in the debate ahead.
