I particularly liked the comments of Raghuram Rajan.
... All I am saying is that there are no easy answers in this thing … and one doesn’t have to be corrupt or in the pay of the financial sector to say, hey, wait a minute: it’s not as simple as letting them all go under or taking them all over. That’s my rant about the banking sector. By and large, I think we’ve done all the things that needed to be done. I think the downside of what we haven’t done is that we haven’t made the banks face up to more pain. That would have made it politically easier to do what needed to be done.
When you say, “make the banks face up to more pain,” what do you mean? Tougher regulation? Big equity stakes for the government—along the British lines?
Equity stakes and other things. For example, even now [the government] can require all compensation above a certain amount to be paid in equity, and equity that is real equity. The way banks do it now is they pay people in shares, but they also buy back equal amounts of shares [in the market]. So there is no increase in capital.
What we have right now is a situation where every saver in the country is, essentially, paying a huge tax to bail out the banking system. We are all getting screwed on our money market accounts—getting 0.25 per cent—and the banks are making a huge spread on nearly every asset they hold, because they are financing them at pretty close to zero rates. Another way of doing this—a way that would be nice to try—is to force the banks to load up on capital.
What is the point of all this? The point of all this is to get banks to lend. Well, they have been doing everything else except lending. Now, it may be that there aren’t that many profitable lending opportunities at this point. But if there aren’t, why are all the savers paying for this? Because you are not getting them to lend any more, and you are not getting more investment, which was the whole point of having interest rates so low. In fact, what you are doing is setting up a whole lot of other asset bubbles at this point.
Another way would be to put more direct pain on the banks. For example, if they were flush with capital and found they couldn’t pay bonuses, so all of this [money] went into increasing the capital base, they would have an incentive to make loans to reduce the effective capital that they had. What we have at the moment is that the citizenry is paying for the banks. Get the banks to pay for themselves.
That gets away from the whole Chicago issue. But what I’m arguing is in Chicago you have the extreme, which says, “Let the chips fall they may. What’s the problem with letting a few banks go under?” Whether you hold that view depends on how much you think the banks as an institution matters. Doug Diamond and I think it does matter. There is a lot of organizational and relationship capital embedded in the banks. If you let them go, it is very hard to start them up [again].
I think the average person can (maybe) grasp that we want to recapitalize the banking system, but I don't think anyone understands why bankers should be getting record bonuses just a year or two after nearly destroying our economy and suffering losses equal to many past years of "earnings" that they've already been paid for.