Wednesday, 24 September 2008

Reading on the financial crisis

Here's one via Martin Wolf in the FT: why Paulson is wrong. I've been reading FT alphaville - great fun - and various bloggers, articles etc. At least we are not short of opinions....

Me & Debbie were talking about this last night, like a pair of concerned amateur astrologers trying to understand a comet.... I think our conclusions were something along these lines:

1. Governments face inevitable pressures to protect voters' savings and houses; banks are therefore quite rational in lending irresponsibly.

2. If it goes ahead, the Paulson government bailout will create the conditions for another house price boom in the next economic cycle. This isn't sustainable. The banks are socializing their losses. (But, on a personal note - stay bullish on property in the long term!)

3. Larger banks are more likely to be "too big to fail" and therefore to lend irresponsibly. What is more, there is an incentive to grow so that one becomes too big to fail.

4. One solution might be to tilt the market towards smaller banks, to dampen the incentive towards inefficient growth. (I don't know how this could be done - maybe by offering them favourable interest rates?)