Why the 2008 crisis is far from over 👇 1/2 Now that @robilypj and Carlo Palombo have been exonerated it’s worth remembering that absolutely nobody faced criminal charges at the executive level for what happened in 2008. On the contrary, 17 years later, we are only now beginning to feel the sharp end of the consequences of bailing out the banks - especially in terms of the public costs and the impact of relentlessly kicking the can down the road rather than properly writing down the bad debt. Indeed, the debt that government balance sheets were saddled with since 2008 to plug the capital hole at the heart of the financial system is only now coming home to roost in terms of its prohibitive debt servicing cost as well as its impact on middle and working class incomes (ask Rachel Reeves). Yet the fundamental reality behind this sorry state of affairs is still rarely addressed. And that is the simple fact that instead of forcing write downs on those who should have absorbed these costs (as it was their poor judgment that led to this crisis) we have decided to keep them afloat at taxpayer expense. Even today. The markets understand this of course. That’s why most banks’ return on equity has flatlined since the crisis and never really recovered. There is a deep knowing, one could say, that such banks should never politically be allowed to provide above par returns to shareholders until their ONGOING state subsidies are unwound. This, however, (at least based on central bank balance sheets) could take years if not decades. Indeed, the current consensus is that the outsized central bank balance sheets (all propped up with government debt which has to be serviced by taxpayers) may have to become a permanent feature of the financial system because without it the plumbing of the financial system tends toward gridlock and breakdown. The absurdity of this situation is that as and when the unsustainability of this framework leads to higher interest rates to deal with real economy supply side shortages, it is BANKS that become the key beneficiaries of the framework (as high interest rates materialise the capital to plug their holes on a permanent level via much higher unearned coupon flows distributed to banks by way of interest on reserves). Yet when politicians and governments dare to reduce the unfair distribution of taxpayer rents to banks via windfall taxes, the markets and banks freak out once again threatening instability, especially in places like Italy. Meloni’s solution to this dilemma was striking a temporary truce with the banking system. If governments can’t claw back the unearned income from banks for the benefit of taxpayers, neither could bank equity holders. To avoid windfall taxes banks were instead told they had to keep these profits in a type of special locked reserve fund. The government wouldn’t get its hands on the money but neither would shareholders. Paying out dividends or buybacks with this cash was banned. Unfortunately, there was no similar conditionality placed on buying other banks’ equities. If you’ve been wondering how one of the eurozone’s weakest banking sectors found the resources to go on a cross border acquisition spree, this is the answer. The current Italian M&A frenzy is largely a workaround to return all that excess cash that’s sitting in the italian bank system via deal flow that rewards shareholders through M&A linked share appreciation. In the UniCredit BPM deal for example, BPM shareholders would have received a premium worth of UniCredit shares. These are far more liquid than BPM and thus more easy to cash out in a way that can materialise that premium in cash terms (without tanking bank stocks entirely). Meanwhile, UniCredit - which the Italians already like to call a “stateless bank” - would have gained greater market dominance potentially impacting domestic credit distribution, while becoming even more dominant and stateless in nature (note its moves on Commerzbank).

2/2 This brings us to the very understandable outbreak of so-called "fiscal dominance" and direct government intervention in the banking system on "national security" grounds. I like to think of what's going on in terms of who gets to benefit from the maximum extractable economic rents in a system at any time. It is a story as old as time. [More on this in a third supplementary tweet.] The balancing act at the heart of this situation is the reality that economic growth becomes constrained if the population is overindebted. An ever greater share of productive output has to be allocated to rentiers, which becomes economically stifling (either by way of taxes or interest payments). This is especially the case when extreme inequality means upward mobility is impossible without becoming overly leveraged on a personal or government level to compensate for the imbalance. The result is a type of modern-day feudalism, where the proceeds of one's work go increasingly to the rentiers from whom average people sublet their meager existence plots from (i.e. houses). Unless one is fortunate enough to achieve escape velocity via the unlikely luck of becoming a superstar in a service economy, one's freedoms simply get increasingly eroded. The result is a population that becomes increasingly immobile and increasingly tied to one's location. (Poor people with mega mortgages can't easily escape to Dubai, especially in a negative equity scenario.) Overexploit the serfs, however, and not only does economic growth flounder (as the exploitation begins to choke the system): things eventually become revolutionary. This is especially the case in a scenario where the rents flow largely to offshore faceless "international capital markets" which refuse to tolerate government officials who seek to remedy the situation with political power. In such scenarios, it becomes increasingly clear that democracy is mostly a sham. It doesn't matter who you elect; they will always be powerless to take on "international capital markets". (Just ask Liz Truss). Yet, there may be an alternative way to realign the system. It's the rise of fiscal dominance aimed at constraining the capacity of banks and rentiers to profiteer from unearned income derived from information-insensitive deposits (i.e. deposits derived from people who don't fully understand the value they are giving away). At this point, you might say Izzy, why are you coming across as all communist? But I'm not. It's different to claw back for the people what is rightfully theirs but socially engineered away from them due to information asymmetry, and seizing rightfully earned property. That is to say: it's important to differentiate unearned income (derived from system-wide banking "float") from income earned by banks via legitimate risk-based lending. And this is really what the stablecoin revolution is all about. If stablecoins really do become the basis of the new financial system, depositors will become increasingly aware of the value they are giving away when holding their wealth in liquid deposits. Slowly, over time, they will learn to keep such funds at a minimum while also understanding that savings accounts offered by most banks are still an opportunity cost. As and when tokenized money market funds become increasingly adopted by common people, interest rate pass-through will actually be achieved to the benefit of everyday people. This will be an architectural shift. Stablecoins — especially under frameworks like the GENIUS Act — will introduce functional segregation between payment rails and credit creation. Thanks to such segregation, banks will have to work much harder and take on more risk to generate profits. Most importantly, if and when those risk-based decisions fail, the consequences of those failures will no longer be systemic. Why? Because funding for payment rails will no longer be entangled with funding for credit. Banks will be able to fail without taking down the system at large, as the payment system will be able to live on. In short, under a stablecoin standard, banks will no longer be able to fund risky lending with information-insensitive deposits. Profits will come only from true credit risk-taking, not unearned rent extraction. And when those risks go bad? Banks can fail without endangering the payment system. Why? Because those funding the rails (at zero return) will now be senior in bankruptcy, meaning the payment float won't just vaporize as it did in 2008 when a major bank goes down. In that world, we can finally begin to let zombie banks die — without threatening systemic collapse. And maybe, just maybe, unwind the mess 2008 left behind to the benefit of everyone.

Bonus tweet: Here are some unstructured thoughts outlining my take on what banking really represents at the moment. At the heart of today’s “fiscal dominance” assault is an age-old struggle: who gets to extract economic rents, and how many lords get to share in the spoils? There is, after all, a natural limit to how much rent can be extracted from a system before it collapses under the weight of its own parasitism. Back in the day, feudal lords eventually learned this — exploit your serfs too hard and the pitchforks come out. To counter that risk they became paternalistic. They built churches, offered festivals, provided basic justice. Not out of kindness, but survival. The same principle applies to modern banking. The rent pool — derived from deposit inertia, regulatory privilege, and implicit state backing — is finite. Banks too often don't grow the pie; they fight over how available rents should be divided. More competition, thus, doesn’t always mean more overall system rent. It just means more lords at the table, each getting a smaller slice. Conversely, consolidation means fewer lords and more concentrated power. Inequality rises. This is why governments get nervous about banking M&A. Blocking deals isn’t just about competition metrics — it’s about sovereignty over rent distribution. A thriving, decentralized banking sector (like old Poland’s wide nobility) spreads privilege more broadly. Consolidation hands it (especially in the modern age) to a few stateless giants beyond the accountability of a potentially revolutionary public. And when those proceeds head offshore, the democratic oversight just gets worse. The rents extracted from domestic serfs (taxpayers, depositors, borrowers) are siphoned abroad, beyond democratic control. So, nationalist pushback isn’t irrational — it’s a defensive move. If our lords can’t benefit, no one lords should benefit either. It's time to actually support public autonomy and independence (which is what populism is really about). Cue fiscal dominance.