For some months now there’s a being a bit of amnesia about how we got to this point in the global banking crisis.Â Does anyone remember 4 months ago when the Swedish model of banking crisis resolution was hotter than the Ikea catalog? Everyone said that they were reading up on the “bad bank” approach in which the government took over the banking system, the dodgy loans therein were dumped into a separate management entity and a slimmed down recapitalized system was returned to the private sector.Â But a funny thing happened on the way to the 2008 version of that bailout: no one did the bad bank part (to be fair, Belgium and Switzerland have done bits of it on a selective basis).
And from hearing policymakers and economists talk about it, the critical case study was the UK decision to invest directly in banks, a proposal that appeared at the same time as the doomed original version of the US Treasury’s Troubled Asset Relief Program.Â Â The Gordon Brown approach was praised to an extent that likely contributed to his infamous Freudian slip (“we not only saved the world”*) and was hailed at the time by Paul Krugman; in fact one suspects that it was Krugman’s praise which went to Brown’s head:
Follow the leader … Readers ask what I think should be done about the financial crisis. The answer is, what Gordon Brown in doing in Britain … Letâ€™s give thanks to Chris Dodd, who insisted on the provision that makes this possible â€” and to Gordon Brown, for showing the way. [link1, link2]
Now it’s January and where are we?Â Instead of the TARP, which was bashed for having the government overpay for bad assets, now they’ve overpaid for equity.Â Banks still aren’t lending.Â The queue of banks looking for capital from the US Treasury gets longer and longer.Â And those bad assets are still sitting on their balance sheets.Â Â Add to that the growing willingness to admit that Brown’s fiscal stimulus was botched (what does the tiny cut in VAT achieve; why does temporary stimulus require permanent tax increases later?) , and maybe we’re back to digging out those articles on the Swedish bailout.
According to the Wall Street Journal (subs. req’d), an OECD report is about to make these points.Â The Journal article notes Prof. Krugman’s praise of the original plan; it would be interesting to hear his reaction; my guess is that it would focus on the failure of the US and UK governments to use their stakes in the banks to exercise more managerial control and force bad asset resolution.
*In fact, the comical nature of Brown’s slip obscured the hubris in what he meant to say.Â Did “we” save the world’s banks?
UPDATE: One more cite of Krugman’s strong endorsement of the Gordon Brown approach — an approach that amounted to capital without resolution or control:
Meanwhile, the British government went straight to the heart of the problem â€” and moved to address it with stunning speed. On Wednesday, Mr. Brownâ€™s officials announced a plan for major equity injections into British banks, backed up by guarantees on bank debt that should get lending among banks, a crucial part of the financial mechanism, running again. And the first major commitment of funds will come on Monday â€” five days after the planâ€™s announcement … Luckily for the world economy, however, Gordon Brown and his officials are making sense. And they may have shown us the way through this crisis.