World Bank Says, Fix Banks First. Uh-Oh.

The World Bank threw its two cents worth into the debate about what the G-20 needed to focus on. Robert Zoellick, the President, says it’s the banks, stupid.

"Stimulus packages alone are not enough,” the World Bank president said. “The International Monetary Fund research of some 122 financial and economic crises shows that turnaround can’t happen unless you clean up the bad assets and recapitalise the banks."

This is one thing that I suspect Europe and the U.S. may well be able to agree upon. They both will roundly disregard this advice and proceed along their merry way, the Europeans pushing for a king to regulate the entire system and the Americans for more irresponsible spending.

Both have stared into the pit that constitutes the world’s financial system and can’t see the bottom. The Americans know that they could fix their system only at great cost to their economy. The Europeans know that they do not have the resources to fix their system. Politicians of both know that any attempt at a real fix would mark the end of their careers.

So they have chosen to put out fires as they develop, nibble around the edges, camouflage the issues with accounting changes and hope that time and a recovering economy do what they can’t or won’t.

If Zoellick is right and economies can’t recover until the banking problem is resolved, then their strategy will not work. Here’s hoping he’s wrong.

Comments

[Moon Kil Woong:]

I like the author's viewpoint. Nothing much is new in the world, the US is promoting uncontrolled spending and debt fueled expansionism, Asia is hoarding assets because they can't stimulate domestic demand for various reasons, and Europe is lecturing the world since they can't manage to organize enough to accomplish anything.

Shouldn't Europe be worrying about it's Eastern Europe meltdown and their own bad banks before lecturing the US. And all their arguments that it's the US' fault their banks bought into derivatives and Madoff's scheme is a bit misplaced as well. No one forced them to buy them. It was their own shameless greed. Shouldn't they fess up to it rather than saying the US is the source for all the greed and financial brinksmanship. Deuschbank and UBS were just as complicit as everyone else.

Please, the last person I would listen to if I wanted a healthy economy is Europe. As parents always say, "Fix your own mess before you start lecuring others about how to fix theirs."

Mar 13 11:04 PM

[Tradememe:]

Good post. This economic crisis was started by the financial crisis and we need to fix the financial system in order to kick start the economy back into sustainable growth. All the growth resulted from the stimulus packages in the world will last until the money runs out.

Mar 13 11:44 PM

[Steven Hansen:]

"So they have chosen to put out fires as they develop, nibble around the edges, camouflage the issues with accounting changes and hope that time and a recovering economy do what they can’t or won’t."

they choose this route because they know the issues are more fundamental and outside of their ability to control. i agree with this approach. just keep the system operating and time will work the issues out of the system.

i do not believe this crisis is financially based - although the symptoms are. there are organic structural defects. to move the economy forward at this time would simply paper over these defects and time shift another collapse a few years down the road.

Mar 14 01:46 AM

[Dave Wrixon:]

Well lets get one thing straight. UBS has bugger all to do with the EU. It is Swiss. That just about sets the tone for the rest of the argument.

The presumption that Wall Street can rip-off investors around the World and get away with it with impunity is also misplaced. Personally, I surprised there is no legal recourse, but from a personal standpoint, I do know that if somebody from Wall Street were trying to sell me anything more than a sandwich, I would not be listening.

This has done more than anything to destroy the reputation of Wall Street, and whilst London is a short-term loser, it will be a long-term winner. This is one of the reasons the UK has done more than anyone else to secure their banks, and probably now has the most stable financial system outside China.


On Mar 13 11:04 PM Moon Kil Woong wrote:

> I like the author's viewpoint. Nothing much is new in the world,
> the US is promoting uncontrolled spending and debt fueled expansionism,
> Asia is hoarding assets because they can't stimulate domestic demand
> for various reasons, and Europe is lecturing the world since they
> can't manage to organize enough to accomplish anything.
>
> Shouldn't Europe be worrying about it's Eastern Europe meltdown and
> their own bad banks before lecturing the US. And all their arguments
> that it's the US' fault their banks bought into derivatives and Madoff's
> scheme is a bit misplaced as well. No one forced them to buy them.
> It was their own shameless greed. Shouldn't they fess up to it rather
> than saying the US is the source for all the greed and financial
> brinksmanship. Deuschbank and UBS were just as complicit as everyone
> else.
>
> Please, the last person I would listen to if I wanted a healthy economy
> is Europe. As parents always say, "Fix your own mess before you start
> lecuring others about how to fix theirs."

Mar 14 02:41 AM

[CautiousInv...:]

At the G20 meeting there is also discussion of greater regulatory reform at the international level. And now a global bad bank; I think see where this going.

It's too expensive; there are huge funding issues; there are sovereignty issues; there are control issues; and troubled assets vary by country and I do not think any international body has the finesses to adopt measures that take into account country and regional differences.

Mar 14 08:25 AM

[EMS News:]

Ah, sovereignty! Who gets to be the next floating currency fiat issue? Obviously, it is now going to be China. This is why a gold-based international trade resolution system is much more stable. Yes, there are still bubbles and downturns but modern regulatory systems such as the ones set up during the Great Depression can easily cope with this. Having international regulatory rules coupled with a gold-based system of international trade resolutions will prevent dysfunctional trade such as we have today with the US, during a global trade collapse, STILL running a trade deficit which is still nearly $40 billion A MONTH. Not a year, a month!

While our government celebrates this reduction in our debit rate, this is still unsustainable. The G20 know perfectly well, this is not a banking collapse but rather, a collapse of the US fiat floating dollar trade system. And NONE of the G20 want to change this system since all benefit from it. They want to restart it so we run a trillion dollar trade deficit again!

This is absurd.

Regards,
EMS News

Mar 14 08:37 AM

[twoplacesat...:]

It wont take long to print the money. Not when you start printing million and trillon dollar notes. Hello late 30's Nazi Germany!


On Mar 13 09:47 PM conceptwizard wrote:

> I agree with the premise that the financial system in the US has
> to be placed on a firm footing before recovery and confidence returns
> to all markets.
> In the World Bank report for the G20 meeting this week the overview
> of the different countries problem areas were a good read and worrysome
> for the poverty stricken and emerging markets.
> I am a bit confused however on the money supply end. Both the printing
> presses in Washington and Fort Worth printed a total of 1,209,000,000
> in one hundred dollar bills for a total of 120,900,000,000 US dollars
> in 2008. Now in order to print 1,000,000,000,000 (one trilion) dollars
> with that annual production in will take 8.27 years. with the committment
> of 10 trilion dollars it will take over 80 years just to print that
> amount of money. Now I am supposing that they must have a warehouse
> full of 100's or going to issue an IOU to the banks rather than deliver
> this in a truck. One trillion dollars on pallets of 4 ft high each
> stacked 2 high placed 10 pallets wide and 100 pallets long and spaced
> one foot apart is larger than a football field. Its had to fathom
> how we can print our way out of this mess and pay it back!
> Now take the total national debt and apply these numbers. Fifty trilion
> times 8.27 years = 413.5 printing years to pay off the national debt,
> with future commitments to social security and medicare. So I guess
> its safe to say it a generational commitment. Maybe they will just
> do an electronic transfer of worthless paper and save a forest.<br/>

Mar 14 08:41 AM

[ArkansasAngie:]

OK ... I'll admit my ignorance. What's the motive? Why doesn't the Government want to "clean up the bad assets and recapitalise the banks"?

I realize that things aren't that simple and the devil is in the detail. But ... which of those details makes them say "Nope! Not going to do that."?

Mar 14 09:07 AM

[Chezfrederick:]

Dear Dave Wrixon, In case you have not read about it, the most acclaimed financial and Banking system is in Canada, not the UK. No bailouts, solid regulations, strong balance sheets, ongoing profits, relatively low levels of write offs and reserves, low leverage... but most importantly they avoided the toxic asset schemes and excessive leverage. In other words, They were not enticed by the greed and follow the leaders (wall Street) down the destructive path as most European banks did, the UK included.

Now the bonuses are gone, London real estate is in a spiral, the UK economy is in shambles, and the deficit will be inherited by multiple generations, which is unfortunate. London is a lovely city.

Having ssid this, I must agree that we are all pointing to the symptom of the problem and overlooking the real problem. We must ask ourselves, how did this asset bubble build up for so long? Further, why was it allowed?

The greed motive is not in of itself unhealthy. It is when it goes unchecked that this becomes a problem. Lack of proper regulations, and regulators participation in this financial orgy is the real cause. You do not build economies on bubbles.

Some thoughts as to what encouraged this include:

1. allowing deductibility of interest on personal homes, encourages homeowners to pile up the mortgage with government blessing

2. Allowing homeowners defaulting on mortgages to walk away from their homes without being held accountable for the debt, while lenders have no recourse on the other homeowner asset is irresponsible and encourages them to exceed rational limits of indebtedness.

3. Unwarranted low interest rates for extended periods of time supported increased leverage for consumers, Banks, and Wall Street with little regulatory intervention.

These are but a few examples... but they resulted in:

1. Fuelling greed

2. reducing spreads

3. disregarding of basic, common sense risk principles.

4. flattening of the credit curve in the endless search for more returns and measly spreads

5. An upward spriral of asset values as bidding up the asset values became a national and international hobby.

The result should not have been unexpected, but everyone waited for the bubble to explode, rather than exercise caution. Whenever we complain, we all need to look in the mirror first, and see how we all contributed to this great bubble. We and our kids will live through the consequences for decades.

I would like to end by saying that I hope, we don't all clamor for solutions which may be the nucleus of the next bubble. We must be patient, manage our expectations, rebuild our savings and capital, for the sake of the generations to come. There is NO silver bullet for this great unwind, we must now live with the hangover for a while.

4.

Mar 14 09:33 AM

[yellowhoard:]

Why can't we have a King and irresponsible spending? The best of both worlds.

Mar 14 10:27 AM

[Justafish:]

I am way past confused on all of this. The Fed is expanding its balance sheet thus increasing the base upon which money can be created. The multiplier to this foundation has be the banking system and the securitization market. The banks are crippled and will remain so for a while (years?) and the securitization (even a word?) is and will remain dead. "TALF" anyone?

If there is no mechanization functioning to lever up the money created by the FED then isn't the action of the FED really kind of meaningless.

When the FED buys assets it creates deposits in a financial institution which the institution can lever up depending on its capital. What went really wacky was the SEC allowing the Investment Banks to lever up as much as they want and all the off balance sheet items.

No investment banks, no securitization of junk. Anyone want to buy a SIV?

Mar 14 10:52 AM

[Steve W fro...:]

The foundational problem was the jettison of any credit standard or down payment requirement for mortgages. This was the driver for the asset bubble which was spread by securitization of the loans into the broader financial system.
This easy credit fueled rise in housing prices then was used, again through access to easy withdrawals of the temporary rise in equities, to fuel excess growth in many areas and other mini asset bubbles.
This junking of any rational credit standards for what is typically a very illiquid and yet the largest asset most Americans will ever own, was and is the foundation of ALL other credit and bank ills and the ensuing worldwide economic
collapse.

IMHO the only thing that will "fix" this is for a bottom to be found in housing prices and therefore a bottom to the first class of "toxic' (read untradable) assets. How to effect this is anyone's guess. Time and markets will eventually do this, particularly in the US as with the natural growth of our population we will see a recovery. How you do it in areas like Europe where the population may be declining, I don't know as this decline seems like it would exacerbate this problem.
It feels like we may be at or near a bottom in many of the worst hit areas as there are now stories appearing of large numbers of people flocking to Las Vegas and Florida to take advantage of the bargains there.

The rally bad way to "fix" this is by more of the same easy credit which seems to be the prescription of the Barney Frank wing of the Democratic party as they continue to prevail upon Fannie and Freddie to make more loans to "underserved" populations as well as institute "temporary" moratoriums on foreclosure. This is absolute idiocy and will do nothing but prolong the agony. If we "the people" continue to pay so little attention to our political masters that they can continue to reward favored groups
and in the process destroy our economy, we have no one to blame but ourselves.

Mar 14 11:09 AM

[Avery Goodman:]

It seems to me that fixing the banks, without removing management, is a fool's game. It is natural, however, for those with a deep interest in the status quo, like the World Bank, IMF, existing big banks, the U.S. Treasury Secretary, the Federal Reserve Chairman, etc., to claim that the banks come first.

For Bernanke and Geithner, as examples, the banks will always come first, because the existing management of the current crop of big banks, put him where he is, and he owes them.

Better to start new banks, with completely different, more responsible people running them, than simply siphon money out of the pockets of taxpayers and into the pockets of the current bankers and/or their immediate underlings, who share the same bankrupt ideas. For example, it seems to me that there is little difference between Vikram Pandit and Charles Prince, who preceded him.

The big money center bank managers have proven themselves to be extraordinarily greedy, and utterly incompetent. We should not now bend over, and let them have fulfill their greedy lusts with us as a nation, and as a world. Instead, we must create new banks with new, more honest and competent managers, and mark a complete separation from the past. These competely new banks, with untainted managements taken out of Main Street, rather than Wall Street, can be capitalized with the government money that would, otherwise, be wasted on the old banks, or banks they would like to create and control. The top as well as the second echelon of the current crop of money center bankers, by contrast, should be banned from the banking industry for life.

Mar 14 12:22 PM

[Conan the B...:]

By the 4th quarter of 2009, US GDP will be operating at a positive 6% year over year.

That's Bernanke Speak for it will be down 0.2% but year over year, going from -6.2% to -0.2% can be considered to be a 6% gain.

Mar 14 12:57 PM

[Dave Wrixon:]

Yep, it didn't happen in the UK. HSBC and Barclays refinanced on the capital markets. The rest basically got nationalised and where the management were culpable they got the boot! Like I said probably the soundest outside China.


On Mar 14 12:22 PM Avery Goodman wrote:

> It seems to me that fixing the banks, without removing management,
> is a fool's game. It is natural, however, for those with a deep interest
> in the status quo, like the World Bank, IMF, existing big banks,
> the U.S. Treasury Secretary, the Federal Reserve Chairman, etc.,
> to claim that the banks come first.
>
> For Bernanke and Geithner, as examples, the banks will always come
> first, because the existing management of the current crop of big
> banks, put him where he is, and he owes them.
>
> Better to start new banks, with completely different, more responsible
> people running them, than simply siphon money out of the pockets
> of taxpayers and into the pockets of the current bankers and/or their
> immediate underlings, who share the same bankrupt ideas. For example,
> it seems to me that there is little difference between Vikram Pandit
> and Charles Prince, who preceded him.
>
> The big money center bank managers have proven themselves to be extraordinarily
> greedy, and utterly incompetent. We should not now bend over, and
> let them have fulfill their greedy lusts with us as a nation, and
> as a world. Instead, we must create new banks with new, more honest
> and competent managers, and mark a complete separation from the past.
> These competely new banks, with untainted managements taken out of
> Main Street, rather than Wall Street, can be capitalized with the
> government money that would, otherwise, be wasted on the old banks,
> or banks they would like to create and control. The top as well as
> the second echelon of the current crop of money center bankers, by
> contrast, should be banned from the banking industry for life.

Mar 14 01:29 PM

[Dave Wrixon:]

Forgot about Canada, I know they are G7 but they do tend to get forgotten. Actually, I feel sorry for Canada because through no real fault of their own their are joined at the hip with the USA. It will probably take more than a sound banking system to keep their heads above water.

Britain is not really in as much mess as some would like to think and the City of London is certainly not ending up with all the heavy bad publicity that is reverberating around the World. It was and is still New Yorks main rival.

And our banks have pretty much all been refinanced. Our Government has been more proactive in this direction but our economy is more dependent on the financial sector than most. London is a real financial powerhouse and going forward, it will be the centre of the Universe.

As for property prices, yes they were expensive. They are still very expensive and they will remain expensive, just a little less so.

The US position is flattered by the strenth of the dollar. What happens when the is a race to the bottom on US Treasuries which is now all but a racing certainty. It is just a question of who loses their nerve first. OK, China might feel she has to much to lose, but what happens when the Japanese, Arabs or even Europeans start heading for the exits. I really don't think Obama can hold discipline when his promises on Government deficiet levels are so laughable.


On Mar 14 09:33 AM Chezfrederick wrote:

> Dear Dave Wrixon, In case you have not read about it, the most acclaimed
> financial and Banking system is in Canada, not the UK. No bailouts,
> solid regulations, strong balance sheets, ongoing profits, relatively
> low levels of write offs and reserves, low leverage... but most importantly
> they avoided the toxic asset schemes and excessive leverage. In other
> words, They were not enticed by the greed and follow the leaders
> (wall Street) down the destructive path as most European banks did,
> the UK included.
>
> Now the bonuses are gone, London real estate is in a spiral, the
> UK economy is in shambles, and the deficit will be inherited by multiple
> generations, which is unfortunate. London is a lovely city.
>
> Having ssid this, I must agree that we are all pointing to the symptom
> of the problem and overlooking the real problem. We must ask ourselves,
> how did this asset bubble build up for so long? Further, why was
> it allowed?
>
> The greed motive is not in of itself unhealthy. It is when it goes
> unchecked that this becomes a problem. Lack of proper regulations,
> and regulators participation in this financial orgy is the real cause.
> You do not build economies on bubbles.
>
> Some thoughts as to what encouraged this include:
>
> 1. allowing deductibility of interest on personal homes, encourages
> homeowners to pile up the mortgage with government blessing
>
> 2. Allowing homeowners defaulting on mortgages to walk away from
> their homes without being held accountable for the debt, while lenders
> have no recourse on the other homeowner asset is irresponsible and
> encourages them to exceed rational limits of indebtedness.
>
> 3. Unwarranted low interest rates for extended periods of time supported
> increased leverage for consumers, Banks, and Wall Street with little
> regulatory intervention.
>
> These are but a few examples... but they resulted in:
>
> 1. Fuelling greed
>
> 2. reducing spreads
>
> 3. disregarding of basic, common sense risk principles.
>
> 4. flattening of the credit curve in the endless search for more
> returns and measly spreads
>
> 5. An upward spriral of asset values as bidding up the asset values
> became a national and international hobby.
>
> The result should not have been unexpected, but everyone waited for
> the bubble to explode, rather than exercise caution. Whenever we
> complain, we all need to look in the mirror first, and see how we
> all contributed to this great bubble. We and our kids will live through
> the consequences for decades.
>
> I would like to end by saying that I hope, we don't all clamor for
> solutions which may be the nucleus of the next bubble. We must be
> patient, manage our expectations, rebuild our savings and capital,
> for the sake of the generations to come. There is NO silver bullet
> for this great unwind, we must now live with the hangover for a while.
>
>
> 4.

Mar 14 01:40 PM

[utilitus:]

...and abundant opportunities for assembly line 'associates' screwing together wheelbarrow kits fresh off the boat from Shanghai.


On Mar 13 10:45 PM Tom Lindmark wrote:

> That's the end game of fiscal stimulus. Millions of workers printing
> money.

Mar 14 04:16 PM

[maranuvian:]

Look ,the only reason Canada doesn't have the toxic assets on their banks books is simple geography. All of the developement in sunbelt and eastern europe drove US banks and europeon banks, with their greed to make the type of loans that resulted in this crisis.
Canada had no demand for these type of loans, simple geography.

Mar 14 08:40 PM

[EMS News:]

No, Canada is a major energy export power.

Mar 14 10:32 PM

[Firat Ünlü:]

There is no point in trying to save the banks, the value of the so-called 'toxic assets' will only continue to decline with rising unemployment and house prices that have yet to find a bottom. They are earning some money now because they're getting the money on the cheap and can charge high interest rates on it, in that environment anyone could make money and have a good cash-flow, unfortunately the losses seem to be so big that those gains are not enough to compensate for them. Not to mention that savers are punished hard, not that it matters though, as this drives them to buy government bonds...

Mar 15 05:25 AM