Posted by: Dirk | February 22, 2011

Cultural Learnings of Kazakhstan for Make Benefit Glorious Nation of Ireland

While Borat‘s experience in the US was probably not so fruitful for his home country Kazakhstan, the WSJ thinks that his Irish cousin can learn from Kazakhstan:

What the Kazakh government did then is what the Irish government didn’t do, and that was to start to talk to the banks’ creditors. Through Samruk-Kazyna, it put taxpayers’ money on the line, injecting fresh capital into both BTA Bank and Alliance Bank, two major lenders.

But that was part of a deal with bond holders, who wrote down a large part of the debts owed by those banks in an effort to make them viable again, and in return for an equity stake. The restructuring process was completed last September, and Samruk-Kazyna has started to look for foreign banks to take BTA and Alliance off its hands.

“We did our homework, we cleared up the balance sheets,” Mr. Kelimbetov said. “We would like to put these problems on the shelf and start a new page. The problem we have is how to manage the banks the right way. Samruk-Kazyna is not a good choice. It definitely should be a private, good bank.”

This sounds good. What many people forgot is that the financial crisis has been caused by investments that turned sour. Not because the economy took a turn for the worse unexpectedly, but because the investments themselves were bad. Investing billions in houses in the belief that real estate prices would continue to grow at double-digit rates for many years was a bad idea, often followed by a bad investment. There is little case to bail-out the banks’ creditors. Of course, claiming these are too-big-to-fail could do the trick. This is also what the Kazakhs understood, but they had the courage to let bond holders of the affected feel part of the pain. That way, they will understand that they get burned again if they touch that flame again.

Meanwhile, in Iceland another proposal to repay the debt stemming from the Icesave disaster is going to get a referendum even though parliament has approved the deal, which is better than the one before, as the BBC reports:

Under the terms of the latest deal Iceland will have longer to repay, and at a lower interest rate than before.

Iceland will pay the money back to the UK at a 3.3% interest rate between 2016 and 2046, rather than a 5.5% interest rate between 2016 and 2024.

The actual cost to the state is expected to be much less than the 4bn euros owed, as the government says most of the repayment will come from selling the assets of Landsbanki.

Switching to Germany, the Bundesamt für Statistik has published some numbers on debts related to the financial crisis:

Wesentlich zum Anstieg beigetragen haben die im Jahr 2010 neu gegründeten (beziehungsweise in Geschäftsbetrieb gegangenen) „Bad Banks“. Die Übertragung von Risikopapieren der Hypo Real Estate in die FMS Wertmanagement sowie die Stützungsmaßnahmen der Ersten Abwicklungsanstalt für die WestLB erhöhten den Schuldenstand zum Jahresende um 232,2 Milliarden Euro.

So, Hypo Real Estate and WestLB (“Düsseldorf”) cost the German tax payer €232.3 bn. Of course, these are debts which in theory can be repaid if assets of these institutions perform. Except most people believe they won’t. Or they will, some day in the 22nd century.

Let me put this in perspective. The German budget 2011 is €305.8 bn (source: Finanzministerium). It seems that the German taxpayer has spent two-thirds of a year’s budget to bail-out two (2) banks. This had been done, and I don’t want to talk about whether it was right or not. Probably, at that point it couldn’t be helped. What could be done though is to make sure that this never happens again. Therefore, it would be nice to establish a commission to enquire into the causes of the financial crisis, which until now has not been done.

A few weeks ago, Axel Leijonhufvud had pointed to the debates of Irving Fisher and Knut Wicksell. Is an inflation-target enough to ensure that there is no redistribution of money through the central bank? They concluded that, yes, that would be enough. They found out in the 1930s that, no, it really wasn’t. Some 60 years later, inflation-targeting found its way back into the macroeconomic textbooks, telling economists that inflation-targeting is enough to ensure that there will not be any redistribution of incomes by the central bank. In 2007, we found out, that this is not enough – again.

Ricardo Caballero’s paper ‘Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrom’ is a good start for somebody from the mainstream, who explained capital flows from China to the US with the assumption of superior quality of US financial assets. It is good that Caballero has now turned his attention to problems in the discipline while many others still continue their work as if nothing had happened. However, the pretense-of-knowledge syndrome does not seem very convincing to me. I would rather argue that this specific malady has itself been caused by the forget-lessons-past syndrome.

It’s good if you realize that you don’t know anything. It is better, however, to know at least the mistakes of the past (which should be discussed more intensely, as Paul Krugman shows). Maybe this is a proposal that is too modest for a scientific discipline. Still, I believe it would be worth considering now.

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