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Saturday, October 11, 2008

"We are All Minskyans now": Support of Partial Nationalization of Financial Markets

The Fed Chair and Treasury Secretary and a number of rich nations have all agreed yesterday on a course of action which would essentially, at least partially, nationalize the banking / financial system worldwide.

I support this measure as an unfortunate necessity of our times. I've come to the conclusion after much thinking and much observation that the only way the government can attempt to end this crisis is to reduce the massive uncertainty in our banking and financial institutions. Having only one or two major / rich nations do this would be problematic as it would facilitate the flow of financial capital out of those troubled countries that failed to nationalize and toward those that did. No, to be beneficial globally, it has to be a global agreement. And it looks like that is what it will be.

Just throwing money at banks is more harmful than good as I mention in previous posts - again to reiterate, reduced interest is beneficial for those that want to consume or invest or borrow money for further lending (banks), but is hardly beneficial to banks and financial intermediaries that want to borrow when the banks they want to lend from have no incentive to do so, and that is where the real problem is. The problem isn't on the borrowing side of the equation, it's on the lending side.

By buying stock in failing banks etc., we assure other banks and customers etc. that that institution has the backing, support, and partial ownership by the government. This expectation alone immediately boosts the banks credit worthiness and reduces the uncertainty that if I as a bank lend to that institution, it could very likely fail. The idea is that interbank lending will eventually increase back to normal, and eventually the money will end up on main street where it belongs.

In order for this to work, massive amounts of stock will have to be bought. 700 Billion will not be enough to stop the global crisis. The entire system has to be normalized, and that will require a lot of nationalization.

Will this mean the end of capitalist financial markets? Not entirely, but it will mean the end of next-to-no-holds-bars financial markets. it will mean a true oversight by big government, and by the Central banks of the world. It will mean Hyman Minsky's predictions will have come true.

It's the end of an era. And the beginning of a new one.


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