Sunday, April 26, 2009

The political curse

Financial crisis may take a long time, because effective measures to deal with them politically unacceptable

U.S. crisis on the scale close to the Japanese, however, the United States can reassure residents that their political culture is more suited to finding solutions. But is this true? The current anti-bank sentiment surprisingly reminiscent of resentment of Japanese voters, who in the 190's have blocked attempts to restore the Japanese banking system. In fact, financial crises - is a vivid example of how political constraints hamper the implementation of economically viable solutions. For example, the Ministry of Finance and the U.S. Fed began to explore options for using public funds to buy illiquid mortgage assets and capital infusions into financial institutions immediately after the rescue of Bear Stearns, the difficulties of investment bank - in March 2008. But six months passed before they began to implement these plans. According to Henry Paulson, the former Minister of Finance at the time, they could not go to Congress, yet people do not realize that a crisis. Of course, Paulson and Ben Bernanke, Congress asked for permission to spend 700 billion dollars to maintain the system after the collapse of Lehman Brothers triggered a general panic.

Some argue that Paulson would take more perseverance to get the funds to the bankruptcy of Lehman. Maybe, but doubtful that he has made a success. По его словам, "это было чрезвычайно сложно сделать даже в разгар кризиса". Economist Philip Svagel, who this fall will begin work in Georgetown University, writes in his article, devoted to working with Paulson in December 2006. to January 2009. that market participants and academic economists are often suggested solutions, which do not take into account the political and legislative obstacles real world. Some scientists have argued that it is necessary, for example, to compel the creditors of banks to exchange debt for shares. However, Mr., Svagel notes that this is wrong, without changing the law on bankruptcy - intricate political process. Similarly, to reduce the incidence of foreclosure mortgage bonds the Ministry of Finance and the Congress have taken a decline in interest rates for homeowners in need, even in spite of the fact that it would not be as effective as the subsidization of major write-offs of amounts under the mortgage. However, the policies and the voters would have reacted to this as an unacceptable way of salvation is not deserving homeowners.

Economists have long been exploring how the institutional constraints impede the efficient economic choices, such as the specific interests of creating barriers to market access for goods and services. The rapidly expanding literature on the study of financial crises, such restrictions have given little attention. Nevertheless, a more careful study shows that with each new crisis, often the same political obstacles. First, the Ministry of Finance of Japan tried to resolve the crisis with the help of the private sector, so as not to cause the anger of voters over the use of taxpayers' money. When these solutions failed, the government in 1995. Invited to spend about 685 billion yen (7 billion U.S. dollars) for the purchase of problem loans seven mortgage finance companies (jusen). This caused great discontent. Opposition parties demanded the resignation of the Minister of Finance and organized a sit in Parliament. According to one survey, against the decision expressed 87% of voters. Ultimately, the measure was adopted, but the experience was so painful that, as a result, the Government has not engaged in the larger banks' overdue loans before 1997.

Despite these difficulties, some governments still struggling hidden political dangers. South Korea is often praised for the fact that after a 1997-98gg. in a financial crisis, it is rapidly and persistently engaged in the acquisition terpevshih the collapse of banks and the purchase of overdue loans. However, the South Korean Government has been able to overcome the anger of the public, claiming that to adopt these measures they forced the IMF, which Koreans still blamed for the crisis. In the early 1990s Sweden has acquired two banks and implement a program of general guarantees of bank liabilities, even though the ruling coalition did not have a majority in parliament. Bo Lundgren, the then finance minister, said that in the case of the Swedish referendum, voters would have voted against the rescue. First, however, the government enlisted the support of the opposition party (which was inherited and the crisis has passed), and then got in the parliament, permission to use unlimited funds, so he did not have to return later and ask more money.

The current case is no different with an open check amount would be an ideal solution for Barak Obama, who recently warned that U.S. banks may "require significant additional resources." Mr. Obama plans to get another 750 billion dollars in the form of stabilization funds budgeted for 2010. But to free up additional funds will be very difficult. Despite dominating the majority in Congress and high level of support, Obama must overcome strong opposition from voters tired of immoderation bankers. This can lead to a breach of certain economic principles.

In general, economists prefer the transparency of hidden subsidies. However, Mr. Svagel said that the Ministry of Finance finally realizes that the understatement of the value of the guarantee of bank assets has caused less political resistance than overpaid for assets precisely because the guarantee is less transparent. Also in the financing of illiquid assets of the Ministry of Finance relied on the Fed to print money, because it does not require the approval of Congress (even if it jeopardizes the independence of the Fed). Another temptation - to combine punishment with help bankers to meet the thirst for justice by the public. Sweden submitted a claim of government nationalized two banks. Some members of the board agreed to return the "significant financial compensation" paid a termination indemnity, to avoid prosecution. Mr. Obama promised that if the banks still need help, they are asked to those who bear the responsibility. Of course, one should not forget that the desire to propitiate the voters could lead to the opposite effect and reinforce their anger. In this case, to direct funds into the banking system becomes even more difficult.

From The Economist print edition

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