The U.S. government should let its weakest banks fail, argues economist Nouriel Roubini, whose pessimistic forecasts have earned him the moniker Dr. Doom.
Roubini and fellow New York University economist Matthew Richardson, writing in the Financial Times, ask the question: “Why keep insolvent banks afloat?
Their answer: “We believe there is no convincing answer; we should instead find ways to manage the systemic risk of bank failures.”
The bank stress tests “could have facilitated this process,” the duo explain.
The problem is, “the tests, which measure how viable banks are under adverse economic conditions, have no ‘failed’ category, even if as many as 10 are reported to need additional capital,” they write.
Given that the economic environment already reflects the tests’ worst-case scenario, the stress test results will not be credibly interpreted as a sign of bank health, they maintain.
So investors “will conclude that banks requiring extra capital have, in fact, failed,” the economists write.
“As a result, these institutions will not be able to raise outside capital and will immediately require government help.”
Roubini and Richardson have plenty of allies.
Investor Jim Rogers told CNBC that ailing banks are “ruining the U.S. economy, the U.S. government, the U.S. central bank and the U.S. dollar."
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