In response to this column, another beauty:
Dear Dr. Krugman,
Splendid column as always.
Part of the reason for the failure to consider the “Iceland strategy” is that, despite its evident failures, we still subscribe to the view that “capital” is a quantity or figure possessed by banks, rather than recognizing that our productive capacity, whatever its nominal value in dollars or any other currency, is comprised of knowledge, social infrastructure, and physical infrastructure. In a crisis, the goal of a government should be to balance risks
of short-term disaster against threats to long term health, i.e., against threats to capital at different time horizons. It is possible that these threats are best addressed by saving banks, but this would be only a special case. In particular, this would occur if and only if banks were seen as having crucial knowledge about risk — whom could be trusted and whom could not — that would be lost if banks themselves were allowed to fail.
Clearly that was not the case here. In fact, bank disbandment might actually improve capital in this case insofar as many banks seem to have institutionalized bad decision-making.
Consider a simple trade-off. Spend $40k to allow one college senior to complete a year of school studying finance at a university or spend $40k to induce a banker who neglects what they learned in finance class 20 years ago and imitates industry trends to stay in their job. Not only is the former spent, rather than placed on a balance sheet, giving it a multiplier effect, it would appear to improve productive capital in the nation’s medium term. This student could conceivably replace the banker-counterpart in 5 years.
I am confident that any number of similar analyses would show that bank bailouts are not only unfair, they are capital depleting.
Best Regards,
Drew Margolin
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