Skene and Kidd’s book poses the uncomfortable question of what would happen if a “too big to fail” bank ultimately proved to be too big to bail out, setting off a chain reaction of defaults and a financial crisis that would dwarf that experienced in 2008.
The nightmare scenario they presents involves bank failures and nationalisations and significant shortages of the capital required to recapitalise bank, sovereign, corporate and household defaults, plummeting asset prices, falling money supply and income, central banks financing massive government deficits and potential exists from the euro.
Bankers on both sides of the Atlantic are continuing to make two serious errors that were major factors in the banking crisis of 2007-8; they are putting more reliance on computer models than on common sense and they are failing to purge balance sheets of failing assets due to inadequate net tangible equity to absorb the losses.
Printing money cannot alleviate such problems, they note. Only deleveraging and restructuring can do this and there is little evidence that there has been much of this over the past five years.
