What us, worry? Banks double down on risk

Fri Jan 29, 2010 4:16pm EST
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By Peter Thal Larsen

DAVOS, Switzerland (Reuters) - The Bank of England estimates governments the world over have spent or committed a staggering $14 trillion to prop up the financial system following the fall of Lehman Brothers in September 2008.

So, what did we get for all that dough?

Unfortunately, more questions than answers.

Indeed, many of the factors that helped cause the previous crisis -- a sustained period of low interest rates, high levels of consumer debt in the West and excessive risk-taking by financial institutions -- remain in place.

At the same time, supersized government bailouts could have created the conditions for future financial crises that will be larger and even more expensive than the one the world has just suffered.

Despite the protestations by politicians that such a large-scale rescue should never be allowed to happen again, their actions over the past two years suggest the opposite.

"Knowing this, the rational response by market participants is to double their bets. This adds to the cost of future crises," Piergiorgio Alessandri and Andrew Haldane of the Bank of England wrote recently.

"This is a doom loop."   Continued...

<p>Protestors hold signs behind Richard Fuld, Chairman and Chief Executive of Lehman Brothers Holdings, as he takes his seat to testify at a House Oversight and Government Reform Committee hearing on the causes and effects of the Lehman Brothers bankruptcy, on Capitol Hill in Washington, in this October 6, 2008 file photo. REUTERS/Jonathan Ernst</p>