Monday, 27 April 2009

Buiter's interview:

Perhaps I'm not understanding what Buiter is actually saying, but in his CNBC interview his implication is that we don't need the current banks as institutions all we need is the capacity of the system to lend. He makes the valid point that the stress tests aren't of much use if they don't stress the conventional loan books (60% of assets) rather than listed securities, however the implication that tax payers won't be able to fund the require cash injections and hence unsecured lenders to the banks should pay 'the pound of flesh' instead is systemically dangerous, naive and illogical as it contradicts the first point that he is making. Given the opaque nature of most banks loan books and the assets that they carry on their balance sheet it is only really possible for lenders to partially estimate the idiosyncratic risk that they are taking in lending to a regulated bank, hence they really are taking systematic risk. The threat of taking steps that would increase potential losses would reduce the capacity of the system to lend, schhhimples.

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