Rogers: failed banks should have been allowed to go to the wall

July 14th, 2009

Jim Rogers, courtesy of Western Headquarters VC/PE Interviews BlogDid the UK government have to bankrupt our economy by bailing out dysfunctional banks such as Royal Bank of Scotland and HBOS?

It’s a question which has been intriguing me since prime minister Gordon Brown won plaudits for rescuing the banks in October 2008 and one to which I have yet to be given a satisfactory answer.

The scaremongers’ response is to say that any failure to have rescued these basket-cases would have bankrupted us all and condemned us to a  return to stone age. But to me this thesis just doesn’t seem to hold water.

The Singapore-based investor Jim Rogers has again jumped into the fray. Just like the Nobel-prize winning economist Joseph Stiglitz, Rogers believes that allowing failed banks to go to the wall would have been far healthier in the long run. Speaking on BBC Radio 4’s Today programme this morning, the Alabaman said he was “outraged that the [US] government bailed anyone out”.

“All of those people should have gone bankrupt …  Isn’t capitalism the system where people are allowed to fail?”

“I would have let them collapse. Throughout history, people have gone bankrupt, new people have taken over the assets and started over. That’s the way the way the world has always worked, that’s the way it should work, what they’re doing now has not worked and will not work.”

These are sentiments I agree with. The danger with salvaging banks that destroyed themselves through their own folly, hubris, corruption, greed (and fraud) is that you’re rewarding failure. You’re giving the same bunch of semi-literate incompetents and freeloaders a second chance — and who knows whether they’ll use it to ruin our economy all over again?

Rogers acknowledged that allowing bust banks to fail would have created “unbelievable problems” in the short term, but in the long-term he said the consequences of rescuing them are going to be far worse.

He said these include the “moral hazard”  that comes from socialising bank losses — the existence of a 100% reliable, state-funded safety net is hardly going to be conducive to responsibility among future generations of bankers. Secondly, Rogers warned that with their state-funded munificence towards failed bankers, the US and UK government have condemned their citizens to decades of economic pain in the shape of Japanese-style L-shaped recessions.

“Look at what Japan did in the 1990s, they still have not recovered and its 19 years later. If you keep propping up your friends and bailing out your friends in Wall Street and the City of London sure, they’re happy for a while, but in the end the system doesn’t work.”

“Of course we could have survived [if the banks had been allowed to go to the wall]. Go look back over your economic history and you’ll see that financial centres throughout history have had some gigantic disasters. In the end the country has survived, the financial system has survived, in the end everybody is better off.”

  • In an earlier blog post (Why Citi and JP Morgan should be allowed to fail from January 7th 2009) hedge fund manager David Greenhorn and the best-selling author Michael Lewis explained how such bank failures could be “managed” in practice.

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