I can’t speak too rashly though because
If you run a current account deficit for long enough your financial system will be NET short deposits. There will be (say) 130 of loans for 100 of deposits. [If you are the
Banking can be profitable even if you are short deposits. Indeed it was silly-profitable for more than a decade before the insane lending started. The high levels of profitability meant that people would lend to banks unsecured in quantity at thin spreads.
Banks became totally dependent on their ability to roll the loans. If they can’t roll this senior unsecured funding they will fail. No ifs, no buts. That results in failure.
Most banks in current account deficit countries have such funding. In
I have calculated out the losses of banks in the
Under the presumption it can finance itself.
But it can’t finance itself unless it can assure unsecured lenders that it is a sensible place to lend.
The end of this financial crisis will occur when unsecured lenders feel safe lending to financial institutions again. If this does not happen the crisis will not end – and there will be a great-depression level event in the
So I am going to set up policy guideline here for a bailout and for all FDIC action. All policy should be geared towards making unsecured lenders feel safe. New regulation should be geared that way. The takeover of banks will be well done if it gives the appearance of respecting the rights of unsecured lenders. The WaMu deal was bad. The Wachovia one was better (only from the position of an unsecured lender but that is the only position that matters).
Face reality. That is who you have to please.
Incidentally the Swedish/Norwegian solution did that but wiped out almost all equity and preferred shareholders. Bank stocks would go down a bundle from here with anything that looks like
PS. I have no dog in this race. I am short a few bank stocks, long a few preferreds and have no position whatsoever in senior debt of banks.