- 余辉
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How to Solve the Financial Crisis
The financial crisis deepens. The bailouts are piecemeal and national, whereas the crisis is global. What"s worse, the policy responses are not based on a clear diagnosis of the underlying problem.
Some politicians talk as if this crisis were merely about illiquidity: banks don"t have enough liquid assets to meet their current obligations. If this were so, the problem would already have been solved. The reason is that most countries have three institutions in place that generally prevent this sort of thing from happening: (1) central banks that are “lenders of last resort”, (2) depositors are insured (up to a specified maximum) and (3) banks are regulated and supervised.
But the problem now is different. Once we understand it, we are close to finding a solution. It is not just a matter of potential illiquidity, but also of potential insolvency: the total assets of many financial institutions could fall short of their total liabilities. At the current fire-sale asset prices, they"re in danger of going broke. The central banks can"t help here, since they lend only for short periods against highly-rated collateral.
The difficulty is that some of the troubled financial institutions are too large too fail (their demise would wipe out too much wealth, shut down too many businesses, throw too many people into unemployment) and are very contagious (their bankruptcy would lead to the bankruptcy of other large institutions). That is why we"ve seen lots of case-by-case bailouts (Bear Stearns, AIG, Fannie Mae und Freddi Mac, Fortis, Bradford and Bingley, Wachovia, Glitnir, etc.), climaxing in the largest, the Paulson plan.
We know how we got into this mess. In very broad brush strokes, it happened like this: (a) Due explicit and implicit state guarantees to banks and their creditors, as well as a lamentable lack of associated regulation, banks faced low costs of risk. So, predictably, they invested in increasingly risky assets, such as subprime mortgage loans. (b) Due to low interest rates, banks faced low costs of borrowing. Thus they became highly leveraged. This meant that even a slight decline in their assets could destroy lots of their equity. (c) Like the regular banking sector, the “shadow banking sector” (money market funds, hedge funds, investment funds, private equity firms, suppliers of commercial paper, insurers such as AIG) funded its short-term liabilities with long-term assets, but the latter faced far less regulation. The result of “regulatory arbitrage,” moving risky business to where it is least regulated.
The rest is history: When the housing bubble burst, the value of mortgage-backed securities fell, and this left many financial institutions with too little capital relative to their debt. Thus they sold whatever assets they could (not just the mortgage-backed securities) and this drove asset prices down further, extending the problem to other financial institutions. With the exception of the Paulson plan, governments have responded to this crisis in a piecemeal fashion, deciding about one institution at a time (Bear Stearns yes, Lehman no). This raised investor uncertainty, leading to a general panic that spread to the money market funds.
If you agree that this is basically the problem, then a solution to this financial crisis is, in my judgment, could run along the following lines. Just as the problem of potential illiquidity can be addressed by “lenders of last resort” (the central banks), so the problem of potential insolvency can be tackled by “buyers of last resort.” The latter are the treasuries and finance ministries that can buy shares or warrants in the troubled financial institutions, thereby providing them with capital they have been lacking. Of course this capital infusion would have to come with additional regulation and supervision.
This sort of solution has been staring us in the face for some time. The broad idea was applied to the recent string of troubled institutions (Fannie and Freddie, AIG, Washington Mutual, Wachovia, Bradford and Bingley, Fortis, etc.). The U.S. government used it to get out of the savings-and-loans crisis of the early 1980s, as did the Swedish government to overcome its financial crisis of 1992. All we need to do now, in this world of global finance, is make it a reliable pillar of our global financial architecture.
Under my proposed solution, each government should establish a trust company that identifies the highly contagious (alias “systemically significant”) financial institutions which cannot be allowed to fail. These institutions receive a solvency insurance and, in return, become bound by new regulatory requirements. For example, the institutions could be required to retain a 10 percent stake in their securitized products and to publicize higher stakes they may hold. In addition, the trust company could require debt-for-equity swaps for institutions with excessively high leverage ratios. Thereby the institutions would reduce their liabilities relative to their assets, with the immediate expense shared by the shareholders and taxpayers. Finally, the trust company would have the duty to sell its stakes in these institutions within the next decade, with the sole objective of maximizing the taxpayers" return.
Since both the regular and shadow banking sectors contain highly contagious financial institutions, both should receive comparable regulation and supervision. This is necessary to avoid regulatory arbitrage. But in this financially interdependent world, regulatory arbitrage is an international phenomenon. The only way to overcome it is through international coordination. As an important step in this direction, coordination among E.U. governments is essential. What is required is a harmonized institutional mechanism – through a central agency or a consortium of existing institutions – to coordinate and oversee the regulatory and supervisory activities of countries, monitor global financial risks, implement a globally integrated financial early warning system, and coordinate internationally the obligations of the buyers of last resort.
In the longer run, the world community should strive to perform these functions through a global monetary agency.
We can be under no illusions: providing solvency insurance is potentially dangerous, since the insured institutions have an almighty incentive to take excessive risks. This is the reason why the concomitant regulation and supervision, coordinated internationally, is so important. As it is, governments are bailing out one troubled institution after another, but often without the regulatory and supervisory safeguards. This creates serious problems for the future.
In short, the solution can be summarized in one sentence: Just as we have overcome the problem of potential systemic illiquidity through a lender of last resort plus deposit insurance regulation and supervision, so we must now overcome the problem of potential systemic insolvency through a buyer of last resort plus solvency insurance, debt-to-equity swaps, regulation and supervision.
This solution above requires courage, which is exactly what these dangerous times demand. The present financial crisis is truly global, requiring a globally coordinated response. Saving one financial institution at a time, each country for itself, can"t solve the problem. On the contrary, it would spread more uncertainty and fear, which would further undermine the global financial system. If we all had the assurance that a new world financial order was in place – that not only defended us from contagious illiquidity through lenders of last resort, but also protected us from contagious insolvency through buyers of last resort – then the widespread fear and distrust in financial markets would dissipate. Confidence could return and thereby the dangers of illiquidity and insolvency of the major financial institutions would recede. We all know that international cooperation is difficult. But as we look into the abyss, contemplating the possibility that the life savings of hundreds of millions could disappear as jobs and businesses are destroyed around the world, it should be clear to all major heads of state, all policy makers and voters, that we must grasp our responsibility to implement the required globally cooperative response.
- 小教板
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金融危机全球的专家都解决不了,就算找强人用汉字写也是“没办法” 别说英文了
- max笔记
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不会哦
- 南yi
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go to ask Mr.Krugman
- S笔记
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reduce risk!!!