Black Swan Guy Blesses Subprime Solution du Jour

♠ Posted by Emmanuel in at 2/25/2009 01:09:00 PM
There's a new entity in town that I am now backing concerning this subprime business. You won't read about it from Nouriel Roubini or the Baseline Scenario just yet for the simple reason that it hasn't really been attempted. A few posts ago, I briefly discussed Richard Murphy's solution for the UK involving the separation of the system for facilitating payments from the banks that are currently making a ham of things due to activities largely unrelated to processing day-to-day financial transactions. As I've said, while the details need to be worked out, this would be the ideal solution for dispelling the "moral hazard" of banks taking in more risk than warranted because no 21st century economy can function properly without a payments handling system.

While visiting the Financial Times site. I came across a piece by Nassim Nicholas Taleb of The Black Swan fame. Basically, he prescribes the very same thing Murphy is suggesting:
However, when it comes to banks and other “too big to fail” entities, the problem is severe: we taxpayers in our respective countries are funding these global monsters and are coughing up money for mistakes made by bankers who retain their bonuses and are hijacking us because, as we are discovering (a little late), banking is a utility and we need them to clean up their mess. We, in fact, are the seller of that free option [in which profits are kept private but losses are made public]. We should claim it back...

This is prompting me to call for the nationalisation of the utility part of banking as the only solution in which society does not grant individuals free options to look after its risks.
Nice idea, but you're not the first to it, Mr. Taleb. Here, I must point out the difference between nationalizing the banks (the Swedish solution) and nationalizing the payments handling mechanism (the Murphy solution). The former solution leaves shareholders on the hook depending on the price the government can command when eventually taking nationalized banks private again and the accurate valuation of impaired assets. The latter solution makes it possible to decouple the fate of the banks from the essential payments handling mechanism. Making the transaction network public allows governments to do away with the "financial blackmail" banks are currently invoking "in the public interest."

Bill Gross concurs that neither forced nationalization nor drastic haircuts are bound to inspire investor confidence. Plus, he doesn't believe the scale of Sweden's financial services industry to be remotely comparable to that of America. For reasons I've already given, detaching the payments handling mechanism appears to be the more practical and feasible solution. Swedish-style nationalization is so 2007, dahling.