I’ve
just stumbled across a truly idiotic proposed solution for failing banks
suggested by Prof Kevin Dowd (in a letter
to the Sunday Telegraph in 2009). His big idea is to put banks through the
normal receivership process that other businesses go through when they’re bust.
And that includes forcing all bank creditors (including ordinary depositors) to
take a hair cut.
Spotted
the flaw? If not, think back to what happened when the “Dowd” solution was
suggested for Cypriot banks a year or so ago. Does the phrase “riots in the
streets” ring any bells?
Or if there weren’t riots, then at the very
least, the politicians implementing the Dowd “Cyprus” solution would be
guaranteed to be voted out of office come the next election. And politicians,
clueless as they are on the subject of banking, normally have a good idea as to
what might get them booted out at the next election.
So
the blunt reality is that incumbent politicians just won’t go for the Dowd
solution. Full Stop. Period. End of argument.
Moreover,
there is a very good justification for any riots or other violent reaction from
the common people that would result from the Dowd solution: it’s that having a
totally safe method of storing one’s money is a basic human right, isn't it?
_________
P.S. (same day): I don't normally respond to LETTERS in this blog. However Prof Dowd listed the above as an "article" in his CV here.
That's why I took an interest in it. And while I'm on this topic I'd just like to mention that I've had about 200 - er - "articles" published in newspapers. However, being of retirement age, I don't see much point in adding them to my CV.
1. You are probably right in arguing that Full reserve banking would have prevented the 2008 crisis. But that is irrelevant.
ReplyDeleteDowd was not discussing how to prevent a future crisis. He focused on what to do in 2008-9. Measures which prevent a mess don't tell you how to clean it up. Introducing Full Reserve banking in 2009 would not have ameliorated the crisis - its a preventative measure.
2. Dowd's thinking has much in common with Ralphanomics.
He advocates "swaps of deposits for equity" i.e. risky investments financed by equity rather than bank sight deposits. However, Dowd shows no appreciation that this can best be done with Kotlikoff style Full Reserve banking introduced BEFORE a crisis, instead of during a bankruptcy crisis.
3. Two points of historical interpretation.
- As I recall the protests in Cyprus were mainly against domestic austerity measures rather than against haircuts for rich foreign depositors.
- There is a many examples of bankruptcies of failed banks which were approved by politicians and did not result in riots or electoral defeat, e.g. Lehman Bros.
So I don't think you have made a case against Dowd's ideas for ameliorating a financial crisis.