Lessons from abroad Post author By Kevin O’Rourke Post date February 27, 2009 I hope the Irish government thinks about and takes seriously these comments by Adam Posen, reported by Paul Krugman. Categories In Uncategorized 4 Comments on Lessons from abroad ← Trichet on Competitiveness → IT Piece on Bad Banks and Risk Insurance 4 replies on “Lessons from abroad” I presume the alternative is the ‘new bank’ idea floated by Roubini. This all links into the merits of the bailout in the first place. If new banks are created and the old assets are left with their owners surely that provides a way of punishing reckless behaviour while allowing public money to be used in new banks for credit. This may be the best way of avoiding the moral hazard problem of not allowing banks to fail. …. but Karl Whelan argues otherwise…. As a declared neophyte may I be forgiven for asking 1.) what exactly does ‘moral hazard’ mean in the circumstances of banks and banking?? Precious little I warrent and 2.) what exactly is the justification, heard repeatedly, of ‘not allowing banks to fail’ – in particular apropos RBOS…?? I even heard some commentator say ‘the UK governement is the (only…) major shareholder (in RBOS) but has refused ownership’ Some trick that. What about John Hempton’s point about bank margins during Japan’s “lost decade” here http://short.ie/happy ? Could this be a reason to be more optimistic ? Barry, You’ll have to be more specific in your question about moral hazard in banking because there are several ways in which I can imagine it being relevant. Probably the most obviously relevant way is the risk that bankers will be protected against the consequences of getting things wrong AGAIN in the future while allowed to take all the benefit if the outcome is positive. As for not allowing RBS to fail, the justification would be that it is so big that its failure would disrupt the UK economy enormously. Businesses and individuals would have to scramble to rearrange their affairs. There may also be knock-on effects on other financial institutions with which RBS has made risk sharing contracts. Finally, there would be international conflict, not least with us here because of its ownership of Ulster Bank. Whether all of these reasons, and there may be others, are sufficient to justify keeping the bank going, is not something on which I have taken a position myself. Comments are closed.