Was it wise to save the banks?

A few months ago, the slump in the global economy was a crucial point in the agenda of many of the G20 leaders. Apathy social room, the collapse of the banking sector, the dilemma of global growth, and the plummeting of the stock exchange were the discussion topics of global leadership.

Governments around the world resolved the issue the most sensitive, chaos in the banking industry, with massive financial contributions to a sector that previously embodied the best (and worst) of capitalism, according to a procedure closer the intervention of centralized communist economies.

The overall slate ranges from 4000 to 5000 billion USD according to the most optimistic estimates, but the final total costs could exceed this range.

The rescue of the banking sector, in principle, was the right course of action to adopt and experts of all political persuasions are agreed on the urgency of such action, including most theorists of free trade enthusiasts who ordinarily deal with left-wing fanatics prehistoric those who dare to question the limited role of government in the economy.

However, many observers are still stunned by the flexibility of the process of rescuing the banks and the very favorable conditions with which the funds were disbursed. Therefore, the financial institutions that benefited from the manna made good use of state funds received for return to profitability and repay their governments.

Other parts of the economy have not experienced such a rapid recovery. Unemployment is still high, the area of ​​housing loans is always messy. The banks have been reluctant to lend, thus creating a decay of the productive sector and sluggish private consumption. The stock market can be returned to the upward trends but, arguably, the real economy is still bearish.

It is clear that banks have played a crucial role in the current economic malaise, but the anti-rescue activists were wrong to defame and to assert that such a conviction should have excluded any public aid. Financial intermediaries are a cornerstone of our economies and it would have been postmodern socio-economically and politically harmful unpleasant to let them flow.

Obviously, a majority of banks bailed out and is now more profitable compared to last year, although sectoral sections are still comatose due to hemorrhage cash that has devastated since the beginning of the recession.

Alas, nothing has changed. These facilities use once again the old practices that have hurt the economy in the first place, under the auspices of regulators strangely blind and dumb.

Banks, necessarily, should be encouraged to make a profit like any private company. But when the profit motive is at the expense of an entire system or is a systemic threat to the productive sector of the economy, then the argument in favor of tougher regulation is of cardinal importance.

Companies must cover their risks by using appropriate techniques, however, speculators seem lately to use derivatives to bet against their benefactors. These practices may seem offensive to an important part of the population but they are understandable when one considers that the camp speculators only promotes the private interests of elites (their investors), which rarely take into account moral factor in their profitability equation.

Obvious example: Greece. The government heavily subsidized the Hellenic banking industry with billions of USD to be rated negatively few months later because of a perceived risk of default.

At present, the political authorities and central bankers should consider the following question: did the rescue work? In other words, huge subsidies for banks and associated additional initiatives they have achieved the initial goals?

Experienced economists and sociologists in the future will address fully the questions about the effectiveness and efficiency of the rescue, but leading experts currently believe that the answers to such questions are negative. The George Mason University economist Peter Boettke argued that the various subsidies have created a "cycle of debt, deficits and expansion of government" that ultimately "economically crippling" major economies, while Barry Ritholtz, famous author of Bailout Nation and president of research firm FusionIQ, think the bailout programs could be better managed.

One can observe that the initial phase of rescue proved effective because it helped to avoid a commotion regional and global banking. But contrary to popular belief, it was the easiest step. One can not underestimate the courage of the authorities in the process, but it is undoubtedly easier for a powerful central bank, as the U.S. Federal Reserve, to make accounting entries to the credit institutions concerned and replenish their assets through the "quantitative easing".

The Fed, like other central banks in the G8, has an enviable position because it can "create" money out of nothing simply by electronically increasing its assets.

The reforms are the real test of political courage, and so far the lack of standards in the financial sector can, if left unchecked, destroying recovery efforts so far made.
Currently there are five distinct factors explaining the poor results obtained so far from the bailouts.

First, financial reform if necessary takes more time at the legislative level because not only the financial lobbies - such as the superpower American Bankers Association - lobbying hard, but the political agenda is occupied by the reform of 'Medicare and geostrategic concerns related to conflicts in Afghanistan and Iraq.

The recent announcement by the head of the Senate Banking Committee Chris Dodd (Democrat of Connecticut) to introduce reforms in the sector is likely to change little in the short term.

Second, the main financial advisers of President Obama are former bosses of Wall Street, and many skeptics are skeptical that a click as close financial interests may be at the forefront of real reforms in a sector that previously they were beneficial.

The following two factors are endogenous to the banking sector. One comes from previous experience cycles of regulation and deregulation which usually disappear reforms after a certain period of time, and the other stems from the unique ability of financial engineers and investment banks to design new products and techniques for dealing with existing laws.

Finally, the control effort should be comprehensive in scope, and the current lack of geographic cooperation as well as the practical difficulty in detecting systemic risk in the banking industry hamper further progress.