KUALA LUMPUR, Sept 2– Financial institutions should be allowed to fail without causing damage to other financial institutions, said British economist Tim Harford.
“ In this crisis, we have propped up banks and insurance companies with failed strategies, because we couldn’t let them collapse. We must figure out a better bankruptcy regime to allow such banks to fail in future,” he said in an e-mail reply to Bernama.
The economist, an author of two economic books and a member of the Financial Times editorial board, said the market has always been a success because bad ideas failed and good ones spread and succeeded.
In a Financial Times article published in April, Harford said banks cannot raise new money and lend it to people as their assets become worthless and weighs down on existing promises to repay depositors and other creditors.
“ They cannot raise fresh money because nobody wants to lend money to a near-bankrupt bank. “ So far, governments have been trying to raise, or at least, stabilise the value of bank assets, but an alternative is to reduce the burden of their liabilities,” he was quoted as saying.
On stimulus packages introduced by governments all over the world, Harford said it was probably the right move but would only help a little in cushioning the impact of a deepening recession.
Saying that there were no easy solutions, he added, “We made big mistakes in bank regulations and the banks made big strategic mistakes. There is no painless solution.”
Harford reiterated that he was not in favour of stimulus packages for an ordinary recession as the timing of such a move must be right.
“By the time the government really starts spending the money, the recession will already be over,” he said.
Harford said even John Maynard Keynes, a renowed economist often associated with stimulus packages, had the same concern.
“ In this case the recession is so deep and dangerous that government stimulus is probably the right thing to do,” he said. – Bernama
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