[OPE] The costs of bailing out the banks...

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Fri Feb 22 2008 - 19:44:29 EST

I was interested to find out an indication of the proportion of funds necessary to bail out the banks internationally, and chanced on this item:

Table: The cost of rescuing banks in several countries

Date         Country     Cost as % of GDP
1980-1982 Argentina       55
1981-1983 Chile             41
1994-1995 Venezuela     18
1995 Mexico                  12-15
1994-1995 Brazil             5-10
1991-1993 Finland           8
1981-1984 Uruguay         7
1991 Sweden                 6
1982-1987 Colombia       5
1987-1989 Norway          4
1984-1991 United States 3

Source: Gerard Caprio & Daniela Klingbiel, "Bank insolvency, Bad Luck, Bad Policy, or Bad Banking?" Paper prepared for the World Bank's Annual Bank Conference on development Economics, Washington DC, April 25-26, 1996. http://info.worldbank.org/etools/docs/library/155591/finsecissues/pdf/caprioklingebiel.pdf  Cited in Frederic S. Mishkin & Stanley G. Eakins, Financial Markets and Institutions, second edition. Reading, Mass: Addison-Wesley, 1998, p. 438.

Mishkin comments that really most of the modern-day bank insolvency problems resulted from financial liberalization (deregulation), which led to an overextension of risk in borrowing and lending - a level of risk that would never have been permitted in a regulated environment, precisely because of the probability of defaults.

Ten years ago, Fed Governor Ferguson has this to say:

"What is the impact of a banking crisis? First, the financial cost of fixing an insolvent banking system is high, and that cost is ultimately borne by the taxpayer. For example, in Australia's banking crisis of 1989-1992, the IMF estimates the cost of rescuing state-owned banks to be nearly 2% of GDP. In Mexico, the overall cost of several programs to support the banking system is estimated (in present value) at 6.5% of GDP. Currently in Japan, the government has announced an intention to spend as much as 30 trillion yen, 6% of GDP, to support its banking system. For Finland, Chile, and Argentina, the IMF estimated the fiscal impact of banking crises to have been between 4% and 8% of GDP. Finally, in the United States, resolution of the S&L crisis is estimated to have cost $150 billion, approximately 3% of GDP in 1990." http://www.federalreserve.gov/boarddocs/speeches/1998/19980416.htm
This time around, the taxpayer is quite likely to fork out bigger, because the sums involved are proportionally larger. For example, it seems that the UK's Northern Rock (only a relatively small operation) had liabilities about 60 times larger than equity, the bailout cost being equivalent to about 7% of GDP, a 25 billion pound chunk. In fact, I would say the taxpayer isn't able to pay out for all the adventures of banks anymore. Thus we can look forward to a substantial "restructuring" of the international banking industry.

John Thornhill comments in the Financial Times:

"We have, it seems, reached that point in the economic cycle when resentment is rising against the rich. In an economic upswing few mind that the rich are doing better than others. If you can buy a Mini then why worry that someone else is picking up a Maserati? But in the downswing it just seems plain unjust that the rich invariably avoid their share of the pain. (...)  Given this ugly mood, the lessons seem clear for politicians: it is time to squeeze the rich, to unleash spies to flush out their hidden bank accounts in Liechtenstein, to force them to pay higher congestion charges for their Porsches - as in London. But popular resentment often begets terrible legislation. Slapping indiscriminate additional taxes on the rich can also prove a futile endeavour. Nimble tax advisers are always likely to remain one step ahead of plodding legislators. (...) What rankles are the "undeserving rich": those who take risks with other people's money but never suffer the consequences of their mistakes; those who receive massive pay-offs even when they have failed; those who evade taxes while benefiting from public goods. (How super-rich can avoid lynching, by John Thornhill Published: February 22 2008). http://www.ft.com/cms/s/0/30c438b2-e165-11dc-a302-0000779fd2ac.html


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