Saturday, October 8, 2011

Letting banks fail

This week, there were reports that Dexia, the Franco-Belgian bank, was to be nationalised by the Belgian government. As Joe Weisenthal reported afterward, a big problem with that is that Belgium's capacity to stand up for the balance sheet, which means its capacity to pay for Dexia's mistakes, is that Belgium simply doesn't have the capacity to pay for it. It would be, as Weisenthal reports Lorcan Roche Kelly saying, a reverse takeover of the state by the bank. this is above and beyond the fact that Belgium is no longer a functioning democracy or responsible government any more. It isn't even a country.

There are a couple of reasonable responses to Belgium's inability to pay for such a rescue. One of them is to simply let Dexia fail. Another option would be to let France take it over (see the graph in the link above), since the French have capacity that the Belgians don't. Another option, promoted by Nicolas Veron at Breugel and the Peterson Institute, is to create a truly European framework for managing banks and banking regulation. This would be a truly superior system to the fragmented political and economic framework Europe currently has, and if it can be done, it should. The question is: will it work?

It is possible that member states will overcome their pride of having national champions that they protect and promote, but until now, the established member states have not shown that they will. The consequence is that the banking industry in Europe, Western Europe particularly, is coddled, subsidised and allowed to form effective oligopolies, whilst taxpayers are left holding the bill in the form of ever-rising public deficits.
Cleaning up after Greek failings is nothing in comparison to what is on these balance sheets.

What some are re-discovering in the wake of the financial crisis is that they sleep better at night if they do their financial business with a credit union, with a regional savings and loan institution that doesn't deal with financial derivatives, or with mutual societies. All of these institutions are much safer than the larger banks, as they don't engage in the kind of risky behaviour that their larger cousins do.

Credit unions, savings and loan institutions and mutual societies became endangered species during the last two decades. They are safer for consumers, they are safer for taxpayers, and they function quite well. They became endangered for four main reasons that public policy and citizens should look at as they deal with this new wave of impending bank collapses or bailouts. First, leverage. The financial leverage that other banks had at their disposal due to financial derivatives put them on steroids. It's no wonder they had more resources, looked more attractive, and could offer better deals to lure folks in the door. Second, carpetbaggers. Company law makes it relatively easy for people who want to de-mutualise a company, list it on the stock exchange and start siphoning off the company's money in shareholder dividends (that was replaced by toxic financial derivatives on the balance sheets, making the bank unstable). That needs to  be reviewed to make it harder or impossible for certain kinds of institutions. Third, the European Union. The EU views local savings and loan institutions as a violation of the free market. It has been trying for ages to get Sparkassen in Germany and elsewhere, which have government representatives on the board, and a series of consumer-friendly regulations that reflect that presence, to push the institutions fully into the market. Fourth, consumers themselves. Many have been forcibly pushed out of the credit union/savings&loan/mutual society sector against their will, but many others, more in fact, never woke up to the fact that these small institutions, the financial equivalent of think global, act local, are better for them and their environment, i.e. the global and national economies.

Let the banks fail. And then let the little people bank as they should. If there is public start-up money that will restart banking on a sustainable basis, such as guaranteeing deposits for those who switch over, this is the place to spend it. Not throwing it down a never-ending hole of debt. The European solution will shift around ownership of the debt, but it will not erase it. It will loom over us for decades.

Ironically, if we go down this route, we will all be stronger and stabler as a result.

1 comment:

  1. Credit Unions? Remind me, how did that turn out for the Spanish?