on the Finanz-markt-stabilisierungs-ergänzungs-gesetz-avalanches


A reader called Hein Kleist wrote:

I find it a little dangerous that you suggest to let problematic banks go bankrupt! Don’t you know that the collapse of Lehman Brothers almost destroyed the world financial system? There could be a chain reaktion of an unknown size!

My answer:

It is important to maintain an open discussion about these things, I dont think this is dangerous, on the contrary.

It is interesting that some people regard the collapse of Lehmann brothers as a major reason for the destruction of the world financial system. Since in my opinion the collapse of Lehmann brothers could at most be seen as a trigger for what has happened – the true reasons seem to be of a more substantial nature. Or in other words: if the system would have been -at least to some extend- healthy enough then the collapse of a bank shouldnt have had these results.

So if people fear an avalanche of bank-bankruptsies (like e.g. if Citigroup would collapse), then such an avalanche appears to happen rather because there is an overall imbalance between what the various banks are standing for and what they actually are.

Interestingly there are people who think that letting banks NOT go out of business may be bad. Here a comment by Martin Hutchinson:

The banking business grew to absorb too much of the nation’s output, and now needs to shrink back to its traditional role. The economically healthiest way for that to happen would be for several banks – the zombies – to go out of business. That would give new market space for all the other banks, allowing them to get new business from ex-zombie bank clients and to take advantage of reduced competition by fattening lending margins.

Concluding: some experts think that letting banks go bankrupt may blow up the whole financial system, others think it may be bad if one wouldn’t allow bank-bankruptsies.

That wide divergence in opinion seems to me to be due to missing evidence about what is really going to happen if virtual markets get adjusted to their “true” value (whatever this is).

And apart from fundamental questions in this context – as I tried to point out in this post the main guideline should be to keep in mind how much the public -aka the taxpayer- has to pay for the downfall of parts of the financial system. In particular this includes that it is less important wether one talks about nationalization or not (personally I find the reservations which are involved with the word “nationalization” very funny) but what is more important is how much liabilities are involved for the taxpayer and what can be done with what “kind of nationalization” or measure.

Nationalization or state-owned/controlled banks may be useful for short-term goals like e.g. the credit crunch however nationalization as a structural instrument per se could become rather more important if long term goals, like the influence of a state on financial decisions are to be pursued. I do think that states should have some control and influence on the financial system and state owned banks may be a way for realizing this. Besides constituting a measure against the credit crunch they may be e.g. useful as a political instrument like for example by handing out emergency loans to home owners, micro entrepreneurs etc. Here an article by Fred Moseley on what he calls “full-fledged” nationalizations and which seems to be heading into a somewhat similar direction.

However what I miss in all the current discussions is how much the ongoing “nationalizations” are going to cost and what the to be expected benefit of the taxpayer should be.

For example here in Germany we have the case of a bank called HRE. What happened here is that due to risky speculations, mainly due to Depfa bank, which was acquired in 2007 the bank got into big troubles. And following the line of the haphazardly put together Finanzmarktstabilisierungsgesetz the german state meanwhile pumped about 100 billion Euros into HRE. That is a german family of four “spent” more than 4000 Euros on that bank.

Not so cool I find.

However worse: It seems that this “little” financial injection didn’t help! So the state of Germany is now thinking about nationalizing this bank, because otherwise it seems the 100 billion would be gone with the wind (?).

Meanwhile the taxpayer doesnt really get to hear what could happen if the state finally “nationalizes” for example HRE – where it should be mentioned at this place that a corresponding law, which makes this possible had already been put on the way (as a matter of fact this law is not called nationalizing-law but according to Sueddeutsche Zeitung “Rettungsübernahmegesetz” (rescue-absorption law) or “Finanz-markt-stabilisierungs-ergänzungs-gesetz” (financial-market-stabilizing-extension-law) (just in case you look for means to avoid the n-word…).

So yes – I would like to get a detailled answer on what are the involved liabilities and/or risks of such a pseudo-whatever-“nationalization”. Do we have any democratic rights on that decision?!

And as a final side remark: The former CEO of HRE, who is one of the major responsible persons for the problems of HRE is now asking for 3.5 million Euros. Leaves me quite at loss for words.

One Response to “on the Finanz-markt-stabilisierungs-ergänzungs-gesetz-avalanches”

  1. H. Mustermann Says:

    It is somewhat understandable that you freak out about the demands of the former CEO of HRE but at least in Germany this attitude seems to be rather an exception that proves the rule. Don’t you think?

Leave a Reply

The below box is for leaving comments. Interesting comments in german, french and russian will eventually be translated into english. If you write a comment you consent to our data protection practices as specified here. If your comment text is not too rude and if your URL is not clearly SPAM then both will be published after moderation. Your email adress will not be published. Moderation is done by hand and might take up to a couple of days.
you can use LaTeX in your math comments, by using the [latex] shortcode:
[latex] E = m c^2 [/latex]