Trouble with rescuing banks without consequences is that it distorts the economy.
By FRIDA GHITISPublished: MARCH 22, 2010 22:44Advertisement
The people of Iceland have just shouted a message that demands close attention from the rest of the world: They are angry – furious – at the way governments have handled the irresponsible behavior of banks. They profoundly resent having to pay for the mistakes of wealthy, unrepentant financiers.They are not alone.The sentiment is not unique to Reykjavik. Just ask anyone in Peoria, or just about anywhere in the United States, Britain, France and beyond. Politicians who think they managed to leave behind them the perilous politics of bank bailouts are in for a surprise.Anger at the recent multibillion-dollar rescue of banks – even if it saved the economy from disaster – continues to simmer in the hearts of voters. And the seething, fueled by the stench of giant post-bailout bonuses, burns across party lines.Iceland and its tiny population of 300,000 became a microcosm of the financial crisis that gripped the world starting in late 2007. Almost every Icelandic bank went bankrupt. One bank, Icesave, had attracted thousands of customers in Britain and the Netherlands with enticing interest rates. When the bank flopped, the British and Dutch governments reimbursed their citizens and demanded thatIceland reimburse them.On March 6, Icelanders voted on a reimbursement plan their prime minister told them was crucial to the country’s economic survival. At a price of $5.3 billion, it amounted to 40 percent of Iceland’s GDP, or $65,000 plus interest for each household. Enraged voters, who had already expressed themselves unsubtly by throwing rocks at government buildings, hurled an even harsher missile. More than 90 percent gave a resounding No to the plan. Barely 1.8% voted Yes.In the end, Iceland will find a way to pay the defunct bank’s debt; it has to. But the real problem will not end there.It has not ended anywhere.THE TROUBLE with bank bailouts without consequences for bankers is not just that astute politicians on the Left or the Right can easily exploit popular anger. The real problem is that the system distorts the functioning of the economy in a way that will inevitably lead to another calamity.This is not an anti-business argument. The system, as it stands now, is corroding the underpinnings of a market economy.Sure, governments could not allow “too-big-to-fail” banks to go under. Their collapse would have taken us all down. But by showing bankers and investors there was no risk in risky investments (because Washington – or London or Paris – would save us) they distorted the system and now encourage more irresponsible risk-taking.The legendary capitalist Warren Buffett has a solution. Despite the recent legislation proposed by Sen. Christopher Dodd, Buffett believes too-big-to-fail will never go away. Given that, he says, “If an institution had to go to society and say ‘save me because if you don’t I’m going to topple society,’ I would have it so that that person, the CEO and his spouse at least come away broke.”In other words, if the bank needs a bailout, the CEO and his top aides should go bankrupt. Never mind bonuses. Buffett sees the risk of personal financial ruin as the penalty that will keep bankers from gambling with our futures. And he says the risk should not be covered by insurance or by the corporation.As it is, risk is now covered by taxpayers. Iceland’s president noted that regular people, “farmers and fishermen, taxpayers, doctors, nurses, teachers” are being asked to pay for the misdeeds of greedy bankers. This is morally wrong.And it is also dangerous.Britain and France have instituted a 50% tax on large bonuses. Thismay help quench the thirst for revenge, but it does not solve theproblem. In Israel, Bank Leumi has come up with a formula that couldresult in “negative bonuses” – the executive has to pay the bank whenperformance is poor.That’s closer to the mark, but still not enough, especially not when the nation’s entire economy is at stake.The voters in Iceland had their turn at the voting booth. They proved that the bitter taste of bank bailouts has not left.In the United States and elsewhere, clever politicians will find the issue, unsolved, ripe for exploiting.Wise leaders must find a way to deal with a problem that, if ignored, is sure to create another painful economic crisis.The author writes about global affairs for The Miami Herald. The Miami Herald/MCT
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