Weekly Blog - 20 March 2023 - Bank Bail Outs
Bank bail outs
The past couple of weeks have seen a number of disturbing developments in the global financial sector. The major international bank Credit Suisse has been taken over by UBS, another Swiss bank, in order to prevent its collapse. Meanwhile earlier this month Silicon Valley Bank and Signature Bank, two smaller and more niche banks in the US, did collapse. The three banks all had very specific internal problems and circumstances, rather than necessarily being indicative of a wider trend. Nevertheless, the sector is highly vulnerable to rumour, contagion and loss of trust spreading at the best of times. Central Banks around the world have been making more cash available to guarantee their banks and shore up confidence in them.[1]
Such moves very much follow the lessons learned, and largely successfully implemented, during the 2008-9 financial crisis. At that time, rather than let their mainstream banks go bust as happened in the financial crisis of 1929 and the following years, governments guaranteed and bailed out mainstream banks, thus preserving the stability of the global financial system and largely preventing a more prolonged and much more painful economic depression. Such careful spotting of emerging economic crises and effective intervention to prevent them is a crucial role that the international community can play to help nations all around the world develop effectively and lift their populations out of poverty.
Financial crises and poverty eradication
As Christians we know that God abhors poverty and wants to see everyone, everywhere lifted out of the misery of extreme poverty. We read in the Old Testament that when God’s people entered the Holy Land they were instructed, “If anyone is poor among your fellow Israelites in any of the towns of the land the LORD your God is giving you, do not be hardhearted or tightfisted towards them. Rather be openhanded and freely lend them whatever they need … Give generously to them and do so without a grudging heart … be openhanded toward your fellow Israelites who are poor and needy in your land” (Deut 15: 4 – 11). Later in the New Testament, the only injunction the apostles laid on Paul when he went out to preach the gospel was that he “should continue to remember the poor, the very thing I had been eager to do all along” (Gal 2: 10).
A major report from Arise, 4 Shifts, looks at all the lessons from the Bible, and the strongest evidence from history, at what works best to lift communities, regions and whole nations out of poverty, whilst also ensuring the natural environment is protected in the process. It finds that 4 key shifts are needed from our current practices. One of these key shifts is that nations need to build strong and fair domestic economies to develop economic independence. A crucial role that the international community can play to support developed nations and help them do this, is to spot, manage and head off global financial crises, which can have hugely damaging impacts on developing countries.
The right response to financial crises
The key lesson from events like the 2008 financial crisis is that the international community has to provide much tougher regulation of their financial sectors to prevent such economic shocks from occurring in the first place. In practice this means: 1) preventing predatory lending and overly risky behaviour; 2) increasing capital reserve requirements to restrict reckless lending and ensure reserves are higher; 3) separating regular ‘high street’ banking from riskier commercial international finance; and 4) ensuring no bank becomes ‘too big to fail’. Individual firms and staff should also be held legally accountable for criminal behaviour and reckless actions. As the British economist Diane Coyle observes, “There is as close to consensus as I’ve ever experienced in the economics profession that the financial sector should not be allowed to retain the structure and behaviours that caused the crisis – although as yet politicians have done nothing fundamental. The banks are too big, too connected to each other so that when one failed the whole system came tumbling down, and too similar so that each went awry in the same way. They have served low-income customers very poorly indeed. Plenty of reforms have been suggested. Through breakups enforced by antitrust agencies and through regulations such as higher capital requirements, banks should be made smaller.” [2]
As well as actioning this in their own nations, the international community should also work collaboratively through global institutions, such as the G20 or the International Monetary Fund, to agree global deals establishing international rules in these areas and to spot and manage global economic shocks when they do occur. As mentioned above, if the worst happens, the lessons from history indicate that it is better for governments to guarantee and bail out major banks and create extra credit to restore confidence in the system as they did in 2008 and 2009, rather than allowing them to fail and collapse triggering global depression as happened in 1929. As the economist Stephanie Kelton wrote in an essay in the book Rethinking Capitalism, looking back on the 2008 – 2009 financial crisis, “the full-blown catastrophe that the financial crash could have triggered has been averted; an economic depression like the one experienced after the 1929 crash did not materialise … the answer can only be found in the prompt reaction – partly intentional but partly automatic – of fiscal and monetary policy variables. This is what really differentiated the present crisis from that of 1929: the combination of aggressive liquidity provision, actively enforced by central banks, plus large public deficits, mainly due to a mechanical reaction of government budgets to the economic downturn prevented a new Great Depression.” [3] (4 Shifts, pg 88 – 89)
It seems then that tougher regulation, the reforms outlined above, and swift action should all decrease the frequency and severity of global financial crises, and reduce the impact they have on the poorest and most vulnerable countries and communities around the world. It remains to be seen whether the current wave of bank troubles is a minor blip or the beginning of a wider problem. But at this stage central banks and governments do appear to have learnt the lessons from recent history and be taking the right steps to address it.
Find out more
Find out more about why the world needs 4 Shifts to transition to a fair and green global economy in Arise’s 4 Shifts Report, and how this forms part of God’s bigger vision for our world in the Arise Manifesto.
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[1] Is this a banking crisis – how worried should I be?, BBC, (20 Mar 2023), https://www.bbc.co.uk/news/business-64951630
[2] Coyle, D., The Economics of Enough, (2011), p. 277
[3] Kelton, S., The Failure of Austerity: Rethinking Financial Policy, in Jacobs, M. & Mazzucato, M. (Eds.), Rethinking Capitalism, (2016), p. 28