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In
an opinion piece on Bloomberg, Mark Gilbert writes
The correct number of banks to fail when a credit bubble
bursts is not zero. If the best way to avoid the mispricing of risk in future
is to sacrifice some of the less-prudent lenders on the altar of liquidity,
then let the culling commence. That is especially the case if it erases the
perception that central banks will always act as lenders of last resort, even
to institutions that don't deserve to survive.
This is the only piece that I can remember seeing
outside of Austrian circles identifying central bank bailouts of commercial
banks as a moral hazard promoting excessive risk-taking and advocating that
banks be allowed to fail.
Gilbert discusses remarks by UK
central banker Mervyn King, who stated,
``The provision of such liquidity support undermines the
efficient pricing of risk by providing ex post insurance for risky
behavior,'' .[and] ``That encourages excessive risk-taking, and sows the
seeds of a future financial crisis.'' [and] helping commercial banks salvage
their ``risky or reckless lending'' is especially dangerous because it
``encourages the view that as long as a bank takes the same sort of risks
that other banks are taking then it is more likely that their liquidity
problems will be insured ex post by the central bank.''
Gilbert describes the problem as
follows:
Banking is essentially a confidence trick. Depositors
have to be confident they can draw freely from their accounts. Retailers have
to be confident swiping a rectangle of plastic in exchange for goods and
services will produce a balance transfer in their favor.
And the banks themselves have to be confident they and their peers have
sufficient assets to meet their liabilities.
For now, that confidence has evaporated as hedge funds and structured
investment vehicles and conduits -- spawned while the credit-market party was
hopping -- come knocking at the door for handouts because the music has
stopped. And thus, the banking community wants the central banks to soothe
its hangover and refill the punchbowl by cutting official interest rates.
Gilbert comes closer than any
mainstream financial writer that I have seen in identifying the true cause of
the problem, but stops just short. As an Austrian I see the problem in the
conflation of deposit banking and credit banking, which has created hybrid
(or better "low-brid") financial institutions known as fractional reserve banks that
can lend out customer deposits while at the same time promising that they are
to be available on demand. Fractional reserve banks are always subject to
bankruptcy, not because a mismatch in the time structure of assets and
liabilities, but because of (as de Soto explains in his book) the contradictory
nature of their legal contract with depositors. Fractional reserve banks are
inherently "a house of
cards".
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
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