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The Banking Crisis: “Wait and See” vs. the Cost of Delay

by | April 24th, 2009 | 03:06 pm
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The administration’s top thinkers on banking regard themselves as avoiding “irreversible errors,” meaning precipitate moves on banking. They argue that “wait and see” may work out and, if it doesn’t, they can always take more dramatic action later (e.g., of the variety advanced by Thomas Hoenig of the Kansas City Fed).

Writing in the NYTimes.com’s Economix this week, Peter Boone and I argue that this line of reasoning makes sense, but needs to be taken to its logical conclusion. Specifically, we should recognize that delay in banking crises almost always and pretty much everywhere leads to lower growth and higher fiscal costs, the price of eventual bailouts increases and the amount of fiscal stimulus required goes up. The jobs lost, the longer recovery, and the higher national debt are all costs that must be weighed in the balance. And that balance, in our view, indicates moving faster and in a more comprehensive manner in the direction suggested by Thomas Hoenig, a senior Federal Reserve official who has a great deal of experience dealing with insolvent banks.

We support much of what the administration is doing. But their errors with regard to banking are creating irreversible damage.

In addition, we didn’t have room in the NYTimes post to make an additional point. If you think the big banks are strong today, as they increasingly defy the government, how easy do you think it will be to take actions against their interests down the road?

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