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Bank crises and the bailouts that often ensue are nothing new. Apropos one such bailout, where the authorities had shored up bank solvency by buying up distressed assets, a certain financial
journalist wrote, _“_In other words, the fortune of the whole community, which the Government represents, ought to make good the losses of private capitalists. This sort of communism, where
the mutuality is all on one side, seems rather attractive to the European capitalists.” The occasion was a bank crisis in Hamburg; the date was November 1857; and the journalist, reporting
to readers of the _New York Daily Tribune_, was Karl Marx. Since 1857 bank crises and bailouts have come and gone, each one adding layers of literature to the question why bank crises happen
and how to prevent them happening again. And with each crisis, public esteem for authorities that oversee financial markets has risen. In 2022, for his analysis of financial markets
dysfunction and for steering them out of the 2008 crisis, Professor Ben Bernanke of Princeton University and the Federal Reserve was awarded Nobel laurels. The complacency of 2022 now seems
the swan song of a different era. At the very moment when public esteem for financial market regulators could not have been made more conspicuous, troubles have set in. In October 2022
pension funds in London required emergency intervention. In March 2023 distress calls have gone out from distant ends of the globe, from swashbuckling venture capitalists in California and
sedate wealth managers in Switzerland. Regulators are discovering that their hold on financial markets is as firm as a grip on a wet bar of soap in a bathtub. How did we get here? Central
banks and regulators have nursed back global financial markets from a near-death experience in 2008. Central banks did this by injecting generous doses of near-zero cost funding in the shape
of quantitative easing (QE), and regulators by arranging regular health checks in the shape of stress tests. Central banks in the post-2008 era administered QE as a temporary application.
It was supposed to be withdrawn after restoring the patient to health. But given that the nemesis in all three recent cases seems to have been the rise in interest rates, for swathes of the
financial sector QE appears to have become a form of artificial life support. Regulators had expanded their remit to supervise banking practices and oversee stress-testing, undertaken
annually with a no-expense-spared allocation of resources. But the pernicious impact of interest rates, increased several times in quick succession, seems to have been missing from their
list of checks. Although it is a commonplace that there is no such thing as a free lunch, it has been thought for some time that there is such a thing as a free bank rescue. Distortions
caused by bank rescues are showing up as the money pouring out from central banks has flooded markets for real assets – housing, art and luxury goods. Latterly, inflation has spilled over
into consumer goods. Once interest rates began to rise, this has begun to pinch those with mortgages as well as other borrowers. Bank bailouts have tried to be all things to all men but have
failed. Financial authorities have now reached the end of the road with the palliative measures applied since 2008. Authorities can rescue banks. Or they can tamp down inflation. But they
cannot do both. It would be unconscionable if the authorities were not able to counter Karl Marx’s adage: that bank bailouts are a form of _communism where the mutuality is all on one side._
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