Bank bailouts trigger anger

Opinion: March 24, 2010 at 12:00a.m.

The people of Iceland have just shouted a message that demands close attention from the rest of the world: They are angry — furious — at the way governments have handled the irresponsible behavior of banks. They profoundly resent having to pay for the mistakes of wealthy, unrepentant financiers. They are not alone.

The sentiment is not unique to Reykjavik. Just ask anyone in Peoria, or just about anywhere in the United States, Britain, France and beyond. Politicians who think they managed to leave behind them the perilous politics of bank bailouts are in for a surprise. Anger at the recent multibillion-dollar rescue of banks — even if it saved the economy from disaster — continues to simmer in the hearts of voters. And the seething, fueled by the stench of giant post-bailout bonuses, burns across party lines.

Bankrupt banks

Iceland and its tiny population of 300,000 became a microcosm of the financial crisis that gripped the world starting in late 2007. Almost every Icelandic bank went bankrupt. One bank, Icesave, had attracted thousands of customers in Britain and the Netherlands with enticing interest rates. When the bank flopped, the British and Dutch governments reimbursed their citizens and demanded that Iceland reimburse them.

On March 6, Icelanders voted on a reimbursement plan their prime minister told them was crucial to the country’s economic survival. At a price of $5.3 billion, it amounted to 40 percent of Iceland GDP, or $65,000 plus interest for each household. Enraged voters, who had already expressed themselves unsubtly by throwing rocks at government buildings, hurled an even harsher missile. More than 90 percent of the voters gave a resounding No. Barely 1.8 percent voted Yes.

In the end, Iceland will find a way to pay the defunct bank’s debt. It has to. But the real problem will not end there. It has not ended anywhere.

The trouble with bank bailouts without consequences for bankers is not just that astute politicians on the left or the right can easily exploit popular anger. The real problem is that the system distorts the functioning of the economy in a way that will inevitably lead to another calamity. This is not an anti-business argument. The system, as it stands now, is corroding the underpinnings of a market economy.

Sure, governments could not allow “too big to fail” banks to go under. Their collapse would have taken us all down. But by showing bankers and investors there was no risk in risky investments (Washington — or London or Paris — would save us) they distorted the system and now encourage more irresponsible risk-taking.

The legendary capitalist Warren Buffett has a solution. Despite the recent legislation proposed by Sen. Christopher Dodd, Buffett believes too-big-to-fail will never go away. Given that, he says, “If an institution had to go to society and say ’save me because if you don’t save me, I’m going to topple society,’ I would have it so that that person, the CEO and his spouse at least come away broke.

In other words, if the bank needs a bailout, the CEO and his top aides should go bankrupt. Never mind bonuses. Buffett sees the risk of personal financial ruin as the penalty that will keep bankers from gambling with our futures. And he says the risk should not be covered by insurance or by the corporation.

As it is, risk is now covered by taxpayers.

Tax on bonuses

Britain and France have instituted a 50-percent tax on large bonuses. This may help quench the thirst for revenge, but it does not solve the problem. In Israel, Bank Leumi has come up with a formula that could result in “negative bonuses” — the executive has to pay the bank — when performance is poor.

In the United States and elsewhere, clever politicians will find the issue, unsolved, ripe for exploiting. Wise leaders must find a way to deal with a problem that, if ignored, is sure to create another painful economic crisis.

Frida Ghitis writes about global affairs for The Miami Herald. Distributed by McClatchy-Tribune Information Services.