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3 Apr 2013
Forex Flash: US efforts to avoid cost to taxpayers ultimately led to larger bill - Nomura
FXstreet.com (Barcelona) - Nomura research Institute Chief Economist Richard Koo notes that US efforts to avoid cost to taxpayers ultimately led to larger bill.
He begins by noting that like former US Treasury Secretary Hank Paulson, who made the decision to allow Lehman Brothers to fail, Mr. Dijsselbloem is arguing that taxpayers should have to pay no more to bail out failed banks. However, he urges investors to remember that the US decision to let Lehman go under increased the ultimate cost to taxpayers several fold-over initial estimates, something that should be evident from recent fiscal deficits, as AIG and other key institutions teetered on the brink of failure and had to be bailed out.
Koo adds that both balance sheet recessions, which occur when the private sector starts to pay down debt in spite of zero interest rates, and systemic banking crises, in which many banks find themselves in the same predicament, are based on fallacy-of-composition problems. This means conditions can worsen quickly and dramatically, and the authorities need to respond with measures that are very different from an ordinary approach based on market principles. However, he writes, “Unfortunately, the recent case of Mr. Dijsselbloem highlights eurozone officials’ lack of understanding of both phenomena. Their view of the crisis appears to be similar to that of a physician who treats his pneumonia-stricken patient as if he had a common cold. I suspect this will weigh heavily on the eurozone economy going forward.”
He begins by noting that like former US Treasury Secretary Hank Paulson, who made the decision to allow Lehman Brothers to fail, Mr. Dijsselbloem is arguing that taxpayers should have to pay no more to bail out failed banks. However, he urges investors to remember that the US decision to let Lehman go under increased the ultimate cost to taxpayers several fold-over initial estimates, something that should be evident from recent fiscal deficits, as AIG and other key institutions teetered on the brink of failure and had to be bailed out.
Koo adds that both balance sheet recessions, which occur when the private sector starts to pay down debt in spite of zero interest rates, and systemic banking crises, in which many banks find themselves in the same predicament, are based on fallacy-of-composition problems. This means conditions can worsen quickly and dramatically, and the authorities need to respond with measures that are very different from an ordinary approach based on market principles. However, he writes, “Unfortunately, the recent case of Mr. Dijsselbloem highlights eurozone officials’ lack of understanding of both phenomena. Their view of the crisis appears to be similar to that of a physician who treats his pneumonia-stricken patient as if he had a common cold. I suspect this will weigh heavily on the eurozone economy going forward.”