Saturday, January 17, 2009

"That's not how we do things in America."

The rampant bank bailouts which include all kinds of strong-armed stipulations make me reminiscent 'bout the good ole' days, back during the Korean financial crisis, when, all-of-a-sudden, Wall Street firms all decided to head for the exits, each refusing to roll over Korea's short-term debt, creating a default crisis.

A Korean government emissary met with Deputy Treasury Secretary Larry Summers, asking him to ask Wall Street to roll over Korea's short-term debt. After all, Korea had been growing at 8% a year for literally decades, and once the crisis passed, they would have no problem paying off their debt, if only they could exchange their short-term debt for debt of longer maturities.

As Deputy Secretary Summers *knew*, however, the problem was the fundamentally un-American, interventionist Korean government, and without forcing fiscal austerity policies on it and forcing many banks to fail, Summers *knew* the problems wouldn't get any better.

His reply?

"That's not how we do things in America. You know our system. We don't tell our banks what to do." [I'm paraphrasing here obviously... but the implication was that the problem with Korea was that there was coordination between banks and government...]

I guess those days are over... Now American banks all rely on the government to keep them solvent. That's how we do things in America. I just wonder how long it will be before Summers convinces Obama that we need to let a few banks fail, to purge the rottenness out of the system, and stop guaranteeing bank deposits, which only causes moral hazard, like Summers advised Indonesia...

Post-script: Once the korean crisis got really bad, the Germans eventually pushed the IMF/US Treasury to talk to the Wall Street banks, whose only complaint will rolling over their debt was that they hadn't been asked sooner... (and that some I-Banks were left out...)

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