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Friday, October 10, 2008

 

what if even recapitalizing the banks does not work?


i've discussed this point before -- most recently in the comments here yesterday --but yves smith relays paul de grauwe as highlighting that recapitalization is not the same as getting banks to lend.

Banks are not lending to each other out of mistrust. Various measures to increase liquidity and backstop banks have not made them look any more favorably upon their brethren, A modern economy needs a banking system. De Grauwe argues in particular that trying to recapitalize banks while the liquidity crisis is on merely throws money into a black hole. The new equity goes poof when the liquidity worries resurface (as they have, each time in more virulent form). The only way to break the cycle is for governments to take over banks, or a least most of the big ones.


here's de grauwe's ft article in full. in other words, "semi-nationalization" -- as the british have titled their bank-equity-stake plan -- is insufficient to resolve the crisis.

one of the features of the worst disasters in economic history is the failure of imagination that bedevils not only the optimists but the pessimists. recapitalization at this relatively early stage of the crisis may be one of those instances where thousands of economists, though certainly advocating a better plan than the treasury, are not much if any closer to the resolution.

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