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This article, which was sent to Opalesque today, was authored by PIMCO’s CEO Mohamed El-Erian and originally published in the Financial Times on January 20, 2009.
There was a time when US banks were like the high-priced properties on a Monopoly board: expensive to buy yet very profitable, especially once you added houses and hotels. This is no longer the case. Banks increasingly resemble the utilities on the board: cheap to buy, with low revenue potential and limited ability to leverage.
The transformation of the banking system into a utility model has become inevitable in light of the risks that banks’ damaged balance sheets pose for the broader economy. The process is being driven by both market- and government-related factors and the implications are huge. In the weeks ahead, look for bold government initiatives, even greater fiscal spending and a further subordination of equity holders. The longer-term impact is even more consequential and threatens to erode the dynamism and growth potential of the US economy.
Banks play an important role in any economy – so much so that, by efficiently channelling funds to productive uses, they can meaningfully improve prospects for employment and wealth creation. Yet, if they run into difficulties, they become sources of turmoil and painful contraction in economic activity.
Emerging economies are familiar – in some cases too familiar – with this binary phenomenon; so are some of the small and medium-sized ind...................... To view our full article Click here
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