By Ronald Fink
The ongoing debate over the costs of bank bailouts is worse than beside the point, according to the head of the British equivalent of the Securities and Exchange Commission. Such back-and-forth obscures the more fundamental issue of the indirect costs of the crisis that required the bailouts in the first place, Adair Turner, chairman of the UK's Financial Services Authority, said at a conference at Cambridge University late last week.
The conference, which inaugurated the establishment of the Institute for New Economic Thinking at the university, challenged many of the assumptions of laissez faire economics, which has dominated policy making in Washington and London in recent decades, especially in the years that preceded the financial crisis.
In keeping with his reputation as a proponent of aggressive bank regulation, Turner insisted during a dinner on the first night of the conference that the financial crisis showed many such assumptions to be faulty.
In so doing, he took issue with commentators who minimize the significance of the crisis by limiting their discussion to the direct costs of the bailout, as in recent articles in the Wall Street Journal and New York Times.
"In the public's eyes the focus appears justified by the huge costs of
rescue," Turner said, according to a copy of his speech posted on the institute's website. "But when we look back on this crisis in, say, ten years' time, what may be striking is how small the direct costs of rescue will then appear."
He predicted many government funding guarantees will turn out to be costless, because central banking liquidity support provided at market or penal rates often shows a profit, and capital injections will be partially and sometimes wholly recovered when stakes are sold. As a result, Turner said, estimates of the total fiscal costs of rescue are usually just a few percentage points of GDP.
But, he continued, the proportion of UK and US government debt
to GDP will likely rise by 40 to 50 percentage points as a result of the crisis that required the bailouts. And Turner suggested that the ultimate cost of the crisis is reflected in what he called "even more important measures of economic harm," including GDP growth foregone, unemployment, and individual wealth and income losses, though he did not say how much of those measure are due to the crisis itself.
Turner insisted, however, that the "crucial issue" is therefore not the fiscal cost of rescue, but "macroeconomic volatility induced by volatile credit supply, first supplied too easily and at too low a price, then severely restricted."
He added that addressing that issue would take more than legislation aimed at preventing further bank bailouts. "It is possible - indeed I suspect likely - that such problems of volatile credit supply would exist even if the Too Big to Fail problem were effectively dealt with," Turner observed.
As a result, he continued, regulators must question the widely accepted view that markets self-correct and that speculation and liquidity are "limitlessly and always beneficial."
For that reason, Turned insisted that in debates about prudential risk controls, such as capital requirements against trading books, "we should be less susceptible than before to arguments that specific regulations are inappropriate because they will reduce market liquidity."
Indeed, added the FSA chairman, "We should take financial transaction taxes and short-term capital flow controls out of the index of forbidden thoughts."