Monday, February 23, 2009

Ideas for getting the world) banking system working

Martin Wolf and Will Hutton discuss some ideas in a gripping MP3 I have just pointed to on my pod page.

Here's another one:

"Governments should promise to buy twice the number of outstanding bank shares in 5 years at twice their recent prices. Markets would immediately price-in this pledge, and the resulting price boom would allow banks to raise necessary capital from private sources."

It's neat, but the problem - as I see it - would be moral hazard. Why run a bank well or safely when you know its share price will double anyway?

Here's a better one:

"Capitalize half a dozen start-up wholesale banks with government money – call them Hamilton, Jefferson, Franklin, Madison, Adams and Washington. Get them borrowing and lending freely, purchasing assets from legacy banks, and then, equally swiftly, sell them off – privatize them."

The idea would be not to help out the bad banks. Let 'em die. Instead start new ones which would form the backbone of a working financial system.

I like the sound of it. A lot.