Keynesians look at the big picture – the “aggregates.” They don’t do details. They don’t like small and informed – instead they prefer sweeping. Such is the sweep of the TARP programme and related “stress tests” that, by lumping good banks with bad, induces undue speculation about all of them.
In reviewing Keynes’s 1931 Treatise of Money, Hayek observed that “Mr Keynes’s aggregates conceal the most fundamental mechanisms of change.” And Henry Hazlitt pointed out that Keynes’s focus on macroeconomic “aggregates” concealed the microeconomic relationships among a multitude of individual prices and wages. (“The” price level, wage level, total output, aggregate demand, and aggregate supply were all statistical fictions, said Hazlitt, that had no reality in the actual market.)
Put like this, we can see just another reason why the promoters of the TARP programme are so keen to have all banks treated the same, whether the banks are liquid or illiquid: so keen that they forced all banks, both good and bad, to sign up to the TARP programme – twisting the arms of those who wanted to refuse – and so eager they’re now refusing to let liquid banks pay back their TARP largesse.
The ruse is obvious: they want the imprimatur of the successful banks to prop up the reputations of failing banks. (That this might just work the other way doesn’t seem to have occurred to them.) But it’s also possible that their habit of “thinking in aggregates” has blinded them now to those “fundamental mechanisms of change” that the economy now needs to undertake.
And one of the most fundamental is the liquidation of bad banks.
Has to happen.
UPDATE: From today’s Wall Street Journal, Busting Bank of America: A case study in how to spread systemic financial risk.
The cavalier use of brute government force has become routine, but the emerging story of how Hank Paulson and Ben Bernanke forced CEO Ken Lewis to blow up Bank of America is still shocking. It's a case study in the ways that panicky regulators have so often botched the bailout and made the financial crisis worse.
In the name of containing "systemic risk," [US] regulators spread it . . .