My thanks to Alex Singleton for alerting me (in a comment on this) to this letter, in yesterday’s Sunday Telegraph:

SIR – The Government’s policy towards the financial crisis is clearly not working. Having “saved” the banking system with the big bail-out last October, it now turns out that the banking system needs another big bail-out three months later, and the plunges in the banks’ share prices last week suggest that this second bail-out is not working either.

The Government’s blundering is leading towards the piece-by-piece nationalisation of the banking system, with no thought-through solution to the underlying problems.

Any solution has to provide a framework within which banks can restructure their balance sheets and restore their financial health. Were these institutions anything but banks, the obvious answer would be for them to go into receivership. Their assets would be written down and creditors’ claims on those assets would be cut; they could then be recapitalised and returned to normal operations.

Yet, radical as it might appear, this same receivership-recovery model can also be applied to banks. It could be implemented via formal receivership, as existing law provides for, but could also form the basis of a government rescue package that would stop further losses being inflicted on taxpayers.

The key elements would involve: write-downs on assets; write-downs on banks’ debts (for example, swaps of deposits for equity, with exemptions for smaller depositors); and measures to minimise disruption to banks’ ongoing ability to provide both credit and payment services (including ensuring that the rescue took place over the weekend).

The combination of asset write-downs and fresh equity would restore confidence and put the banks on a sound footing again.

Prof Kevin Dowd
Centre for Risk and Insurance Studies, Nottingham University Business School

What is so excellent about this is that Dowd absolutely does not confine himself to complaining about what the Government is doing.  He also says what it should be doing instead.  In my posting on Friday I said:

… the whole British Establishment will be yelling to the anti-bail-out mob (i.e. us): Well what the hell do you think we should be doing?  If Dowd answers that question eloquently and with precision, and does not confine himself merely to denouncing the current blunders, then he could become a major figure.

It’s almost as if he read that, decided that he would like to be a major figure, and then wrote his letter.  Not what happened I’m sure, but profoundly encouraging nevertheless.