The Thing We Have to Fear is Fear-Mongering Itself

Matt Welch | September 29, 2008

The fabulously named economists Luc Laevan and Fabian Valencia have a working paper on banking crises [pdf] out for the International Monetary Fund, covering 42 meltdowns in 37 countries since 1970. Their conclusion? Beware bailouts:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions' liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.

Link via tax-code-spelunking journalist David Cay Johnston, who in another post over at TPM Cafe urges some much-needed journalistic skepticism about the scope and urgency of the crisis, and therefore the need to bail anyone out:

The news is full of anecdotal evidence of companies and individuals having trouble getting credit. But there is no sign that this is other than cherry picking specifics because in the ordinary course of business lots of people get turned down or have their credit lines frozen.

If the markets are about to seize up how did one of the biggest players in the deeply troubled newspaper industry, McClatchy, get its $1.2 billion of credit lines renewed on Friday? And keep in mind that McClatchy gets the majority of its advertising revenue from two of the states with the biggest subprime mortgage/overvalued housing problems - California and Florida.

The TED spread, a technical market measure widely cited, is not even at record levels (or at least was not when I last looked Thursday night). If this is the worst financial crisis since the Great Depression then why is not setting new records - huge new records?

Brian Doherty interviewed Johnston back in December 2007.

Comments

|9.29.08 @ 9:25AM|#

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense.

Shocked, I am.

|9.29.08 @ 9:30AM|#

I must not fear.
Fear is the mind-killer.
Fear is the little death that brings total obliteration.
I will face my fear.
I will permit it to pass over me and through me.
And when it has gone past I will turn the inner eye to see its path.
Where the fear has gone there will be nothing.
Only I will remain.

|9.29.08 @ 9:35AM|#

Existing empirical research . . .

No kidding. You'd think someone would have noticed this before. Maybe even given it a name. Something to do with, say, the "hazard" created by disconnecting risk and reward, a name that might try to capture the way this disconnect tempts people to do the wrong thing. Needs to be catchy, though, maybe try to capture the way this disconnect is wrong, "immoral" even. "Immoral hazard" seems kind of backwards, though.

Any ideas?

SIV|9.29.08 @ 9:37AM|#

The TED spread, a technical market measure widely cited, is not even at record levels (or at least was not when I last looked Thursday night). If this is the worst financial crisis since the Great Depression then why is not setting new records - huge new records?


FWIW, it ain't thursday night anymore.....


The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, rose to a record 322 basis points today. It was 110 basis points a month ago.

TPM isn't exactly where I would go for economic information.

|9.29.08 @ 10:55AM|#

Japan did something along these lines and ended up in a ten-year recession. Sure hope that doesn't happen here.

robc|9.29.08 @ 11:10AM|#

Epi,

Bi-lal kaifa

ktc2|9.29.08 @ 11:17AM|#

No, ours will be 25.

|9.29.08 @ 11:44AM|#

SIV already pointed this out, but you're dead wrong Mr. Welch.

http://www.bloomberg.com/apps/quote?ticker=.TEDSP:IND

The TED spread has been over 200 bp for the past 2 weeks!

|9.29.08 @ 11:49AM|#

Why borrow from another bank, when the Fed is begging you to take their money?

|9.29.08 @ 12:45PM|#

R C Dean
I know, I know!! We could call it non-goodness hazard...nah... how about ethical hazard... hmmm... that doesn't sound right either...let's try "honest hazard"...nah, say that 10 times in a row... OK, "proper hazard"...that sounds like your suppose to do it. I give up. we'll never be able to give a name to this phenomenon - we'll just have to spell it out - you give people money for stupidity, and you get lots of stupidity. Stupid hazard!!! thats what they should call it.

#$%|9.29.08 @ 7:06PM|#

How about: Full-tard Haz-ard