Crisis Is Over, but Where’s the Fix?
3/10/11, NY Times
When the financial system began to crumble more than three years ago, the world rushed to rescue it. Country after country went deeply into debt to keep banks afloat and prevent a deep recession from turning into something worse.
It worked. This week was the second anniversary of the nadir of the crisis. Most stock markets around the world are at least 75 percent higher than they were then. Financial stocks, which led the markets down, have also led them up.
At the time, rescuing seemed more important than reforming. The world economy was breaking down because of a lack of financing. Trade flows collapsed, and companies and individuals stopped spending. It seemed clear that halting the slide was critical.
But the world has changed since then. The economic recovery in most developed countries is stuttering at best, and governments are struggling with their own finances. It is time for remorse and second-guessing.
A surprising citadel of that second-guessing is at the International Monetary Fund, where researchers this week concluded that the rescues “only treated the symptoms of the global financial meltdown.”
The researchers, Stijn Claessens and Ceyla Pazarbasioglu, warned that “a rare opportunity is being thrown away to tackle the underlying causes. Without restructuring financial institutions’ balance sheets and their operations, as well as their assets — loans to over-indebted households and enterprises — the economic recovery will suffer, and the seeds will be sown for the next crisis.”...
It is clear that there are functions of the financial system that must be performed, among them the allocation of capital and the setting of prices. But there is at least a suspicion that a significant part of modern finance has no real value for anyone except the participants...
And of course, there is also the fact that the financial system did not accomplish what it was supposed to do. “At the core of these functions is the ability to find and set the right price, including the extent to which it reflects risk,” Antonio Borges, an I.M.F. official and former vice chairman of Goldman Sachs International, told the conference. “This is not really a question of financial sophistication, of complex products or greedy bankers. It is a question of getting the prices wrong.” He added, “It is unbelievable how wrong they were.”...
In retrospect, it is clear that the bailouts came with too little pain for those responsible. Bondholders who financed banks that failed largely escaped pain. That was true even in Ireland, where the bailout would have led to a default of government debt had Europe not stepped in. It is still not clear how Ireland will pay its national debt, but the bank bondholders did fine. nytimes.com |
