Alan Greenspan became a popular figure. Everytime there was the threat of a downturn or a suggestion the US should draw in its belt, he slashed interest rates, created more money and allowed the good times to go on rolling.
More recently he has become less popular. His successor, fighting to deflate the bubble his policies helped create, has attracted some support for the view that Mr Greenspan overdid the bubbles It was Mr Bernanke’s decision with colleagues to deflate the bubble and restore some balance in the US economy that helped create current conditions. In the UK the Bank of England followed a similar course with its interest rate strategy over the last ten years, preferring always to inflate the housing bubble than to correct the imbalances until they became so gross around three years ago.
When governments saw the results of their monetary authorities new austerity they moved from “teach them a lesson” to “let’s panic”. They now want the authorities to try to puff up a bubble again. In the UK the governemnt thinks one more puff will enable them to emerge from the electral hole of the opinion polls, and in the US Mr Obama, only used to being popular, thinks one more bubble could make him a hero just as Mr Greenspan used to be.
That’s why they want to support rather than mend the banks. That’s why they are committing unbelievable sums of money to underwriting business that has gone wrong, more large sums to “reflationary packages” and still more money to what they hope will be new lending. They are gambling the credit worthiness of the state on the hope that short term it will spark things back into life.
I have news for them. The way out of this mess is not another bubble, but working through all the past excess and winding it up, paying it off or netting it out with as little loss as possible. The private sector banks should take the hits, not the taxpayer. The Central banks should stand behind the banks that have a solvent future, and should force the pace of making the larger banks solvent in the long term by insisting they raise more of their own capital by asset sales, cost reductions and other marks of better management. We can neither afford to lose a major bank, nor afford to feather bed it with state capital. If in need the authorities should lend short term money against promises of better management and against what security they can find.
The loss of most of the £37 billion the UK government foolishly tipped into three banks here in just two months should be a warning to them. The rate of loss is too high. They should have blocked the LLoyds/HBOS deal, as advised here, so LLoyds was untainted by all this. They should have required substantial change at HBOS for any loans they asked for from the state to tide them over. They should have demanded that RBS wind up, sell or otherwise reduce the extent of its risks in the investment banking side of its activities. We have a large bank attached to a medium sized government. The bank is in danger of capsizing the public finances.