Now that's what I call a banking crisis, Part 124
One of the great things about investment banking is that even while a bank like Merrill Lynch goes down the tubes and gets taken over, its economics team steadily churns out research about the process as if it were happening to somebody else. It's a bit like when the BBC had to report on its own self-destruction after the Hutton Report. It can be done, and a paper from Merrill's economics team today makes fascinating reading. It's a summary of a much bigger IMF document on banking crisis, which surveys 124 historic banking crises. It's so good I am simply going to quote from it so that, if anybody in the White House cabinet room happens to be reading this, they too can quote bits of it as they get on bended knee to each other to plead for signatures on the TARP Act....
"An inconvenient truth: Net fiscal costs from banking crises are substantial, averaging 13.3% of GDP. The government is highly unlikely to make a profit on any program; the average recovery rate is just 18% of gross fiscal costs. Real GDP losses average 20% relative to trend during the first four years of the crisis. There is a negative correlation between output losses and fiscal costs: the higher the fiscal costs, the smaller the loss of output."
Translation: Dear Mr Obama, forget your plans for healthcare. Dear Mr McCain, who is gonna pay for more surges? Dear Mr & Mrs Joe Public of America - expect 4 years where you feel 80% as wealthy as you do now...
"The risk of a financing crisis: With foreigners significant holders and continued buyers of US financial assets, primarily fixed income, and primarily foreign official institutions, we remain concerned of the risk of a US current account deficit financing crisis. Nearly half of outstanding Treasurys are held by foreigners and 90% of foreign inflows into
agency debt has been from foreign official institutions."
Translation: Dear Messrs Obama & McCain, please contact a Mr Hu Jin Tao as soon as possible.
Quoting its own Chief Asia Economist, TJ Bond, Merrill's team writes: "Last, but not least, TJ suggests that the recapitalisation process is best served by also drawing capital from surplus nations abroad; this would require, however, that the US allows to some degree loss of management control. This has been the case with private capital inflows, but would be best extended to sovereign wealth funds."
Translation: America's banking sector has to be owned either by the state, or by somebody else's state: Dubai, China take your pick. This is true whatever comes out of the $700bn deal.
"So far the US and the UK have not suffered from a sudden stop of capital inflows which has been the feature of many episodes in the past. We continue to remain concerned of the risk of a current account financing crisis. Note overnight an article in the South China Morning Post suggested that China's regulators had told mainland banks to stop lending to US financial institutions. The article was later vehemently denied by the regulators."
Translation: The fate of the US economy lies in the hands of the Chinese government. It's a good job we've been so nice to them up to now.
The whole Merrill document can be found at this URL.