Paul Krugman: Another Bank Bailout

Oh, wow — another bank bailout, this time in Spain. Who could have predicted that?

The answer, of course, is everybody. In fact, the whole story is starting to feel like a comedy routine: yet
again the economy slides, unemployment soars, banks get into trouble, governments rush to the rescue —but somehow it’s only the banks that get rescued, not the unemployed.

Just to be clear, Spanish banks did indeed need a bailout. Spain was clearly on the edge of a “doom loop” — a well-understood process in which concern about banks’ solvency forces the banks to sell assets, which drives down the prices of those assets, which makes people even more worried about solvency. Governments can stop such doom loops with an infusion of cash; in this case, however, the Spanish government’s own solvency is in question, so the cash had to come from a broader European fund.