As David noted on Saturday, all the signs are that we’re now about to do some kind of ‘bad bank’ arrangement here in the UK. As he says,
Valuation remains controversial, with banks scrabbling to extract as much as they possibly can from the taxpayer. One option (following the Swedes again) is to use an independent board to have a go at guessing what all the crap is worth.
But, David concluded, an alternative option would simply be to to nationalise the whole sector – an approach that former Bank of England Monetary Policy Committee member Willem Buiter was already mooting on his FT blog at the end of last week.
Well, yesterday Paul Krugman came out and said exactly the same thing in the New York Times:
What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.
Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that [troubled banks] are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.
Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.
Which poses the question: is the UK going to spend hundreds of billions on a new bank bail-out just as expert opinion concludes that its proposed approach is useless?
