Once again it seems that the European Commission and the US government have taken different views on the architecture of tomorrow’s financial sector. For all the ‘change’ we have been promised by Barack Obama, it certainly doesn’t seem to apply to Financial markets regulation. Of course it could be coincidental that some of his biggest backers (financially, that is) are making their money on Wall Street and have profited greatly from the lack of regulation. But let’s just stick to the facts and leave the speculation to those more versed in conspiracy theories.
The initial actions on both sides of the Atlantic were so similar that they were interchangeable. Some banks collapsed and were nationalised, others got into liquidity/solvency trouble and were helped out by a variety of government subsidies. Repo-ing of illiquid assets, government recapitalisation, access to cheap funding and a soft approach on competition issues. Banks were (are) essentially allowed to make huge profits thanks to lavish public subsidies that are trying to make good the huge losses they incurred while speculating with their bloated balance sheets.
These actions were decisive and a prime example of crisis management such as it should be. Sure miscalculations were made, poor judgement sometimes and the odd error even. But mainly, governments did what they are supposed to do in emergency situations: take decisions as they are needed. In fact, only very few people will now argue that these decisions were wrong. Well to the left of the political spectrum some people seem to think that any bank that found itself in trouble should have been nationalised. Well to the right (and these economic commentators outnumber the former by a great number on the internet) some argue that all bank should have been allowed fail, because that’s the way capitalism works. Just in case you are wondering: I have nothing but respect for the difficult decisions governments faced in those panicky days.
Of course the question is what you do with the reality that huge sums of public money have been used to prevent the sudden deflation (you can call it popping if you like) of the financial sector balloon. And this is where the differences of opinion are starting to show. The US policy seems to be: ‘We will not allow any major financial institution to fail anymore’. Neelie Kroes has shown her view on that topic lately. Any bank enjoying the benefits of taxpayer backing should be shrunk or broken up. ING was the first victim (and rightly so, the subsidies from the Dutch government for ING were shockingly lavish), next ware RboS and Lloyds, but there will be more to follow.
I have to admit that when Kroes was appointed to the all important competition post at the EC I wasn’t too happy. Too many connections with corporate Europe, a few shady dealings here and there. She has proved me wrong. But if the overhaul of the banking and insurance sector will be limited to breaking up a few big players then you will find me disappointed. But that requires an agreement between the various ministers of finance in Europe. Prepare for very active opposition from Britain, where casino capitalism is still seen as a legitimate way of making money. Thank God for the Lisbon treaty!*
(*) The Lisbon treaty will allow more majority decisions on important issues, where now we are constrained to unanimity votes.
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