Ben, a simple solution to the growing crisis:

The U.S. started the bad bank bailouts, now Europe is following their lead.

Bank bailouts can work, and they can be done without costing taxpayers billions of dollars or rewarding executives and investors for making bad decisions. They have to be done the right way.

There are seven steps:
• Seize the bank
• Fire management
• Write down the value of the bad loans to the amount they are actually worth
• Zero out the bank's equity (shareholders lose everything)
• Apportion the losses to the bank's subordinated debt holders (they lose something)
• Inject new capital in the form of senior debt and new equity
• Refloat the bank (by selling all or part of it).
In a restructuring like this, the bank doesn't stop operating, so the economy isn't ruined.

Meanwhile, idiots who loaned the bank money and bought the bank's stock take losses they deserve and the bank is then immediately rendered solid again, ready to make new loans to those who deserve it. Hopefully loan officers are more prudent next time.

It doesn't matter how big the bank is, you can do this with any size bank. And, if necessary, you can do it with lots of banks at the same time. You just need an entity, like the Federal Reserve or ECB that has the power to seize and restructure banks before they actually go bankrupt and recapitalise the banks.

That's the right way to bail out banks. And that's the only way to do it without rewarding stupid, reckless lending and failing to address the root of the problem (stupid real-estate loans). These banks are broke because they made lots of stupid loans.

When anyone in the real world makes a stupid loan, they lose their money.

The idiots who loaned money to banks which made stupid loans deserve to lose their money. The idiots who made the stupid loans deserve to lose their jobs.

The reason why this doesn't happen, of course is obvious: the idiots run the asylum.

One of the most erudite historically correct articles I have thus far read!
One also agrees with Geoff of Perth.
If only the Irish/Spanish/Greeks/etc/etc, followed Geoff's very cogent advice, instead of the Chicago economic school?
I agree with Geoff, we and they ought to socialise the profits and privatise the debt! If only to ensure those who created the problem are the ones now harmed by it!
However, we still need to address a problem, which if left largely unfixed, will be a contagion that spreads and creates a Great Depression style stagnation!
A lot/most of Europe's problems started over a decade ago with derivatives; [cooked books,] and or, quite grossly overvalued assets?
That simply couldn't happen prior to 1976, as explained in great detail by the Author.
So, and given we cannot unscramble the economic mess we or rather the Chicago economic school and its devotees have created, we need to chose another model!
Following any further down this pathway can only create more of the same!
Doing what you've always done, all while expecting a different outcome is madness.
We therefore need to embrace social credit, to first and foremost, internalise our economy, reacquire our economic sovereignty and quarantine it from offshore contagions?
The second is to very thoroughly transform our tax system, by completely jettisoning the current highly convoluted and extraordinarily complex system in its entirety, and replace all that, and the endemic avoidance, with a single stand alone unavoidable broad based consumption/expenditure tax!
Which then can be adjusted, region by region, to alone, stimulate or put the brakes on, various parts of a patently multi speed economy!
Meaning, interest rates could be progressively reduced and then held at historically low levels, to stimulate genuine entrepreneurial endeavour and cooperative enterprise.
We need to reclaim both energy and capital as the poeples' property, if only to stop the endless economy harming speculation, that accompanies privatisation of either? we also need to invest in our own people and their better ideas!
Thank providence we still have our our currency!
Rhrosty.

Geoff,

Take control of failed banks, ok, but indict the management, seize/quarantine their assets (or at least require repayment of salary and bonuses received during the identified period of the bank's decline); accept that the bank is owned by the equity holders and those 'idiots' who have invested their savings in good faith in the bank; and look to the bank's debtors (those who have received loans from the bank) to make good on those loans - even if this means those debtors going into administration or bankruptcy - and let those debtors who feel they have been misled by bank officials seek reparation in civil court action against those bank officials, and not against the bank or the bank's new 'owners'.

If necessary, sell off the bank's assets to reimburse equity and creditor 'owners' of the bank, and let them also seek reparation for losses from the bank's board and executive through class civil action. Let no miscreants off the hook!

A principal failing of 'modern monetarism' has been slack or non-existent regulation, whereby debtors are allowed 'off the hook' (as in the US by simply handing in the keys and walking away from their debts without any further responsibilities), and whereby banks have been able to resell loans (particularly 'bad' loans) and then simply wash their hands of any further responsibility - any bank loan should remain a responsibility of the issuing bank until repayment is satisfactorily accomplished.

Derivatives trading and 'short selling' should be abolished; the accounts of all exchange-listed businesses should be transparent, freely available, and subject to ongoing effective impartial audit; investors should have a formal say in the objectives and future direction of businesses - including in major investment decisions - as the 'owners' of the business. And, miscreant 'ratings agencies' should be brought to account for their misdeeds.

"Free" trade should first and foremost honour the best interests of the nation, national resources and workers and households. A vigorous review and reform of 'globalised capitalisation' mechanisms, of foreign exchange trading, and of the whole current world economic model and philosophy is long overdue.

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It is clear the world has confronted a similar crisis to the one we see now and that John Keynes was instrumental in providing the the method of repair and that as a result the world enjoyed a long period of steady growth and stability. Given there seems to be a dearth of economists who both understand the Keynesian formula and will advocate it, this dis citation is of very high value in laying a platform to consider current failure and the possibility that real alternatives are proven and available.

Ben Rees, you have done it again, I want to know more about just what John Maynard may have proposed to remedy the currant seeming unrealistic policy settings in Europe and the US. I don't particularly want to see a great depression in my time, we must all do what we can to see the wider media pick up this story and let the world know who is responsible and how to fix it....

I wonder can online opinion ask you to explain a Keynesian formula to be used for the current crisis
Nev

Thankyou Ben Rees for your excellent and accurate summation of the global economic situation. Quite clearly the worlds economies are clean out of control. Keynes new the dangers of free trade and advocated that Governments should always maintain control of their countries financial and trade affairs. As you point out Friedmann,s free market approach was adopted and so control mechanisms were dismantled by the many countries which bought the jargon. I have never believed that the people of Australia widely understood the rammifications or knowingly gave Hawke and Keating a mandate to de-regulate and in this light I consider their actions to be traitorous.

It seems to me the current monetary policies are akin to always having to clean up after the flood instead of manning the control gates and avoiding the damage eg. the Wivenhoe dam fiasco in Queensland last summer. How can our labour force compete with the $2 an hour slave labour which produces most of the products which fill our retail shops? Can the government re-regulate and re-introduce any of the controls which might address this cost disparity between so called rich and developing countries, I wonder?