The Banking crisis: You’re doing it wrong!

Its a wonderful thing, hindsight. 4 years on and the effects of the response to the 2008 banking crisis are now visible. National governments responded in two key ways to the crisis. This is what we have now learnt. 

The “popular” response

The US, UK, Ireland et al responded to the crisis by means of extensive bailouts. These governments acted to prevent the collapse of the banking system, to not let it fail. The reasoning? Preventing worldwide financial armageddon. 

The Icelandic response

Let them fail. 

The cost of the popular response

The US government bailed out Fannie May and Freddie Mac alone to the tune of what is now believed to be in the region of $135 billion. This figure is liable to increase, depending on the future prospects of these institutions continued exposure to the US housing and mortgage markets. The UK government has exposure to its banks in the region of £124 billion. Irish bailout costs sit somewhere in the €45 billion region. Spanish bailout costs are estimated to be around €124 billion, and rising.  

The cost of the Icelandic response

The Icelandic government guaranteed personal deposits, but otherwise did not stump up the cash for the insolvent Icelandic banks. The government refused to shoulder the $209 billion in debt (11 times the size of Iceland’s GDP at the time) racked up by Icelandic banks.

The winners and losers.

The Icelandic government decided to make the creditors of the banks responsible for the failure. The mantra was, 

“You gave them money. It was your money. You should have been more responsible with it. We are not going to pay for your mistake.”

Elsewhere, the failure of the private banking industry was turned into a national debt burden. The taxpayers of these countries have shouldered the debts of the banks, and are now paying through the nose. The individual burden of each taxpayer in Ireland is said to be in the region of €25,000. 

We are now in a situation where there is significant animosity, even a vengeful attitude toward the banking industry. 

“The bankers need to pay for their mistakes.” 

The fact of the matter is that the bankers should have paid for their mistakes in the first place. We would have avoided all this recrimination, finger-pointing and banker-bashing.

Each of these states is now shouldered with the poisonous debts of the banks: mortgages that will never be paid, loans that have no hope of return, equities worth a fraction of what they were sold for. The banks are now so averse to loaning money to anyone, it is nearly impossible to access credit. First time house buyers in the UK are faced with the prospect of paying 30% of any mortgage upfront. This is an impossible task.

The system remains broken, with no clear route out. Some countries, such as the UK are now making an attempt to decrease their deficit (albeit feebly, Mr Osborne), while other countries such as Spain remain hungry for loans, going cap in hand to the European Central Bank for more money. The debt spiral is essentially out of control.

And Iceland? Well, I hear they aren’t doing too bad at all.

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Edmund Greaves is co-editor of The Libertarian Press. He also writes travel articles at the www.curiousenglishman.com

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