Willem Buiter: "Why Zombie Banks Will Need More Money" Posted on July 3, 2009 by Yves Smith Willem Buiter touches on the state of bank lending and proposals for financial services industry supervision. Enjoy! Post navigation ← More Book Review Candidates…. Links 7/3/09 → Subscribe to Post Comments 4 comments anne July 3, 2009 at 11:16 am There's a bigger problem, or at least one of wider scope, going on here: No one trusts the system any more. Rob Johnson made a compelling argument yesterday about the loss of faith in financial institutions and in the decision-making processes governments and institutions are going through to "fix" them. Trust is a kind of capital, too, but no one is injecting that these days. Anonymous Jones July 3, 2009 at 11:59 am Anne — While I agree that a lot of trust has been lost, labeling it a "problem" is not necessarily the only way to view it. You are correct that trust is a vital component of smooth transactions, but rational distrust is a vital component as well. I think the current crisis is ample evidence that the optimal amount of distrust was seriously lacking in the last twenty years. profnickd July 4, 2009 at 12:01 am Buiter says at 2:09 that the banks are "undercapitalised" (i.e. insolvent) so therefore they need more capital or they won't start lending again. Talk about living in an upside down world — the banks are "undercapitalised" because they lent too much to manifestly unqualified debtors. Less lending, or more precisely, less risk averse lending, should be the norm. Buiter apparently wants to go back to dot.com and housing bubbles — which is exactly why we are in this problem in the first place. For the banks that made bad loans and face insolvency, well that's the free market. They should be taken over by whatever is the appropriate government agency, depositors be reimbursed up to the $250K limit, and their remaining assets (if any) sold off. Sorry Citi and BoA, that's what happens in a free economy: the incompetent go bankrupt. Fabian July 5, 2009 at 1:03 pm W. B. said, the ECB should play a major role in supervising banks which are central to the system. In my opinion the goal must be that no bank is central to the system. Every bank sould become small enough to fail. Comments are closed. Tip Jar Please Donate or Subscribe!