Thursday, October 9, 2008

US still a leader on the policy front, unfortunately

Now that the US has passed this unfortunate bailout package, other governments around the world are eager to pursue similar policies. This is quite silly, as we seem to create a gigantic moral hazard problem at great cost.

Iceland reached heights in silliness by taking over much of its banking sector. Icelandic banks had been very aggressive on European financial markets, in particular pursuing depositors with high interests rates. This means the banking sector is much larger than the country in that a majority of its customers are abroad. Why would the government then step in to save foreign customers? This is especially questionable as the Icelandic government is now itself in a situation of default as a consequence and is begging for money in Russia, of all places.

The only explanation I can think of for this decision is that Iceland just imitated US policy action without thinking too much. And other European governments are following suit as well, except for Switzerland. The latter is an interesting case, as UBS has been particularly bad hit by the subprime-mortgage situation. But knowing the government would not help, it recapitalized several months ago with funding from Asia, and it seems to be in relatively good shape now. The other big Swiss bank, Credit Suisse, is fundamentally healthy and has announced plans to hire 1000 investment bankers in anticipation of a rush of new customers. So much for preventing moral hazard problems: not intervening leads to a healthier financial sector.


Independent Accountant said...

Surprise, surprise. We agree on this one. It's "monkey see, monkey do" out there.

edwin said...

Someone really decided to put on their thinking cap, great going! It’s fantastic to see people really writing about the important things.
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