“What is Breaking into a Bank Compared With Founding a Bank?” (Bertolt Brecht)

Are the international and national efforts to stabilize the banking system misguided? Should we not rather let the whole system break? Hundreds of billions of dollars and euros have recently been put into propping up the imploding banking systems in developed countries, using a wide variety of instruments. Since banks’ balance sheets have been devastated by the collapse in the value of assets and collateral they hold against loans, governments and national banks have been called to the rescue.

All policymakers hold that this is not throwing good money after bad; that it is not about saving the banks (which are responsible for this mess in the first place), but that the purpose of these unprecedentedly expensive rescue attempts is to re-establish the essential function of the banking system, i.e. to finance the “real economy”. So far the visible success of these activities is less than expected. Of course, we all know that there are time lags before public interventions take root, because contracts need to be negotiated, drawn up, approved by boards; some banks prefer not to be seen in the company of those being “helped out” and do not accept such money; some do not like the conditions the public bodies attach to these rescue operations, they are too expensive, to cumbersome, too interventionist, too…… Others are in such dire straits that they accept any conditionality.

But it turns out that even, given these understandable delays, still we hear many voices from the real economy that lending has not resumed, that if it has resumed costs (interest rates) are prohibitively high, tenors too short-term, required documentation too extensive. We also hear – and have evidence – that some banks do take public money, but do not on-lend, but rather keep it as cash, deposit it overnight with the FED or ECB and take it out again next morning, in order to have it available in case of need.

So all this public money has not done any good? And why do the respective governments who have put some of this money into recapitalization of the banks, in effect partly or wholly nationalizing them, not use their newly acquired role as bank owners to get bank management to do what they were obliged to do? This is one of the big political-economy puzzles. It seems that taxpayer money is used to nationalize banks (prop up their dwindled equity) in a clandestine way, in other words so that nobody knows that part nationalization has occurred. This can only mean that governments are not using their ownership rights in an appropriate manner. In the UK we see some of this unfortunate coyness in the reports that some nationalized banks have used public money to keep paying obscene bonuses to bank managers – obviously as a reward for them running the banks in the ground. Others do not on-lend. It does seem that the “neo-liberal” dogma of “more private, less state” is still engrained in politicians’ minds. They do, but don’t tell: is this the accountability we have been promised? Or, on another level: why do national banks still pay positive interest rates on these overnight deposits, which are done instead of on-lending to the private sector? Why are incentives like negative interest rates not used to discourage such undesirable behaviour? Why do we taxpayers have to cough up money for inappropriate non-use?

Most banks which receive public funds refute the claims that they have stopped on-lending. Hard data will soon clarify this claim. Of course, we also know that demand for loans must have fallen dramatically, as a result of the crisis. If consumer demand falls, firms will not invest in new plant and equipment, thus will demand fewer credit. But we also hear stories about necessary working capital financing having dried up – and firms having to close down not for lack of demand, but because they cannot finance their raw materials purchases and wages.

It does seem that the real depth of the crisis has not yet been realized by all concerned. Banks would like to go back to the status-quo-ante, to have their balance sheets fixed, taken their bad assets away (preferably by the taxpayer) and resume their previous ways – when they were the lords of the economic universe. Policymakers quibble in multilateral organisations about who pays for whom and who should take the lead and who had which idea in the first place, instead of doubling over in a joint effort to take on joint responsibility. International financial institutions have finally started to get their act together and join into a joint action plan – at least in South and East Europe.

De-leveraging the overblown financial system will be painful for many. But there is no way around it: some banks will have to disappear, but the system will be stronger on account of that.

The last one and a half years would surely have given Bertolt Brecht much to expand on the quote in the title; but Brecht was an optimist as far as survival of the capitalist system was concerned. He would have advised to re-fashion the banking system in the interest of the average citizen. He would have told the politicians to give up their strange reluctance to use the leverage of ownership rights and put the banks back into the lending business.