Do Commercial Banks Get It?

Financial Times has a nice op-ed that discusses how despite liquidity injections from the central banks, commercial banks still can’t manage to straighten their mess out. (the full article was available earlier, but now requires free registration to be read in its entirety)

The combined central bank injection of liquidity last week was impressive. Still, more than five months after the interbank market froze, banks’ thirst for cash seems unquenchable. The central banks have done everything they can to keep financial markets orderly. They took the risk of feeding the moral hazard beast and what did they achieve? So far they have avoided the much-feared “Big Crunch”, but the end of the tunnel is not yet in sight. The time has come to ask the harder question: do commercial banks get it?

What are they drinking? We have an idea.

Obviously, shareholders do not like the dilution of their stakes, but this is what shareholding is all about. If a company has suffered, or is about to suffer, heavy losses, its shareholders will have to bear part of the trouble. Delaying tactics prolong the misery without solving the problem, which will not go away.

Shareholders have no problem enjoying immense profits during good times. It’s nice to see someone point out how delay tactics have no real effect in solving the problems. We’ve heard many delay tactics proposed for the mortgage markets such as bailouts and temporary rate freezes, but ultimately they have no effect on solving the problem.