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Comment on “Beyond the age of leverage: new banks must arise” | Niall Ferguson

Niall Ferguson nails the ultimate irony in the world today.  Every government is set on increasing debt as a means to solve the current crisis, however the reality is that they are potentially sending good money after bad, and not addressing the core issue. (emphasis mine)

Beyond the age of leverage: new banks must arise |

Call it the Great Repression. The reality being repressed is that the western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Worst of all are the banks. The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt.

He goes on to offer specific ideas on how the great deleveraging could manifest:

  • bank debt write offs with terms designed to give banks time to sort themselves out within a fixed time – he proposes 10 years.

“There are precedents for such drastic action, notably the response to the Swedish banking crisis of the early 1990s. The critical point is to avoid the nightmare of a state-dominated financial sector. The last thing America needs is to have all its banks run like the rail company Amtrak or, worse, the Internal Revenue Service. State life-support for moribund dinosaur banks is an expedient designed to avert the disaster of a generalised banking extinction not a belated victory for socialism. It should not and must not impede the formation of new banks by the private sector. So recapitalisation must be a once-only event, with no enduring government guarantees or subsidies. There should be a clear timetable for “reprivatisation” within, say, 10 years.”

  • “The second step we need to take is a generalised conversion of American mortgages to lower interest rates and longer maturities.”  He goes on to highlight systemic changes to debt and terms of debt contracts over the last 150 years that were used as vehicles to bring the economy back in line.

Point for economists and Keynes.  Ferguson says:

Today’s born-again Keynesians seem to have forgotten that their prescription of a deficit-financed fiscal stimulus stood the best chance of working in a more or less closed economy. But this is a globalised world, where unco-ordinated profligacy by national governments is more likely to generate bond market and currency market volatility than a return to growth.

Relevance to Bankwatch:

All in all another thoughtful piece directed at broad based solutions that deleverage the world.  His argument that the approach of all world governments to borrow and create government based stimulus is not directed at the problem crisis symptoms, and sounds common sense.  When asset values have collapsed in the world by 40 – 50% and debt remained unchanged, how is more debt a solution?

It strikes me there is an opportunity here for banks’ to consider new and innovative products that alter terms, conditions and rates of existing debt that relieves pressure as suggested in Fergusons 2nd point above.  I would add that not just ‘New banks must arise” per Ferguson’s title, but that financial alternatives must arise too.

4 Responses

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  1. “The last thing America needs is to have all its banks run like the rail company Amtrak”. Because running them in an underregulated free market system has worked so much better.

    Nationalization is not a good idea, but neither is more laissez-faire. Let’s stop accepting it when bankers tell the auditors and regulators that they’re not smart enough to understand the brilliant risk management strategies that the bankers have in place.


    February 3, 2009 at 11:45

  2. I was puzzled by what Niall means by “new” banks. His article only recommends more write-offs by the incumbents, and amending the rate on existing mortgages. Surely that would merely perpetuate the banks and the system we have, whereas something else would need to be done for anything “new” to emerge.

    In any event, I suspect that the future of banking and finance is beyond anyone’s “control” at this point. And the only certainty is that the system will be quite different from what we have today.

    Let’s hope it’s better!

    Simon Deane-Johns

    February 3, 2009 at 13:18

  3. The difference between socialism and capitalism? Under socialism, banks are first nationalized and then go bankrupt. In the capitalist system it appears to work the other way around.



    February 4, 2009 at 16:46

  4. @Simon … yes I too was disappointed he mentioned new banks yet did not outline anything specific. That represents the next level of thinking on this topic.


    February 5, 2009 at 01:38

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