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the European Commission hascome forward with one bailout plan after another for Europe’sdistressed economies. Now it wants tosocialize not only government debt by introducing Eurobonds, but also bankingdebt by proclaiming a “banking union.”
Socializing bank debt is both unjustand will result in a future misallocation of resources.
Socialization of bank debt across borders implies thata country’s private borrowing costs are artificially reduced below marketrates, as insurance (in the form of credit-default swaps) is provided free ofcharge by other countries.(reasons against banking union)
History offers countless examples of the misallocationof resources that can result from socialization of bank debt. One is the 1980’s savings and loan crisis in the United States,which cost US taxpayers more than $100 billion. Under the umbrella of commondeposit insurance, US savings banks made a “gamble for resurrection”– borrowing excessively from their depositors and lending the money out torisky enterprises, knowing that potential profits could be paid out asdividends to shareholders while potential losses would be socialized.And essentially the same happened with US subprimemortgage lending and with the Spanish banking system in the 2000’s. In both cases, banks took excessiverisks in the expectation – eventually vindicated – that governments would bail them out.Spanish banks speculated on a continuing increase inreal-estate prices, which would bring large capital gains to their customers.Indeed, they often lent homeowners more than 100% of the underlying property’svalue. To compensate for the damage that their reckless behavior caused, theyreceived
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