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I guess it was the first years of elementary school. Our teacher used to say: "If everyone wipes her garden, the streets will be as clean as a whistle." I do not know whether it was because I was 'over-comprehensive', but I could not get it: "If my mother wipes our garden, will not the garbage dirty the garden of our neighbor? So, what will our neighbor do? If he also wipes his garden, what will happen to the garden of the other neighbor?"
I guess I assumed that everyone will wipe the garbage to the same direction. In short, I believed that all of the garbage would leave the city borders from the house at the edge of the city. Otherwise, the garbage would constantly move in between our house and our neighbor's house, which would not be so nice. I did not consider the option that everyone, after wiping the garbage in their garden, would collect and dump them out.
Assuming such an attitude, in particular by the financial sector, in crisis periods further deepens the problems. Think of two banks. Assume that bank B extended short-term loan to bank A. Bank B of course has extended credit to companies. As domestic and foreign demand is completely cut and companies end up making no sales, cash flows deteriorate and they have hard time in fulfilling their liabilities. As the problem worsens, a part of the credit bank B had extended to companies become troubled. Bank B fails to collect some of the cash it lent.
As a result, the value of the assets of bank B comprised of the sum of the credits extended to bank A falls down and cash flow id disrupted. Under these circumstances, bank B will call back (or not renew) the short term credit extended to bank A to pay the debts due. Maybe, it will also call back some part of the credit extended to companies or ask for additional guarantee.
The situation as a whole means: If bank B have not encountered such problems, bank A and some companies would have been able to renew the credits extended by bank B and bank B would not have been forced to repay its debts under such an unexpected method. The situation as a whole implies that cash flow deteriorated and banks faced liquidity problems.
In short, bank B when wiping its garden is leaving the garbage in the garden of bank A and some companies rather than dumping them out. Helpless bank A will also assume such behavior soon. Financial sector does not have a ground to dump garbage, due to its nature; each neighbor has to dump the garbage in the garden of another neighbor.
Thank God I have won my 'columnist honor' back. It appears that when I was young, I was considering the working principles of the banking sector... That was why I failed to understand what the point in wiping out the garden of our own was. Lack of comprehension has nothing to do with it. What a modesty...
Under such circumstances, there arises a need for a 'garbage collection agency' so that one's garbage does not be problem for another one.
'Garbage collection agency' is a requirement of unusual times. This is why for almost five years we keep on mentioning measures like designing a mechanism providing credit guarantee, using that mechanism to restructure credits, preparing the legal framework enabling the provision of capital support to banks when necessary or increasing deposit guarantees. I hope that one's garbage does not be problem for another one...
This commentary was published in Radikal daily on 09.02.2009l