Saturday, March 07, 2009

Is There A Way To Save The Banks And NOT The Criminal Banksters?

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Like everyone I've ever talked to, Tom Hoenig, president of the Federal Reserve Bank of Kansas City, thinks the Inside-the-Beltway/Wall Street elite-- the real axis of evil-- is not dealing with the financial meltdown properly. You can take it as gospel, to begin with, that if a program started with Bush, it was designed to enhance the status of the rich and powerful and further pauperize working families. Hoenig urged Washington to scrap its current capital-investing rescues of banks deemed too big to fail and prepare to “resolve” them the old-fashioned way-- bankruptcy.
In a speech he titled “Too Big Has Failed,” Hoenig urged Washington to declare insolvent banks to be insolvent, replace their managers and strip out the toxic assets weighing them down.

Such steps would leave the government in control of clean banks it could sell to new owners, or operate as “bridge banks” until it could privatize their ownership again.

Hoenig acknowledged his way would leave stockholders to “bear the full risk” of their investments but said it also would stop the festering that is driving up the ultimate cost to taxpayers.

Moreover, he sees definitive intervention as a necessary step in curing the credit crisis.

“Until these kinds of actions are taken, there is little chance to restore market confidence and get credit markets flowing,” Hoenig said in his prepared text. “It’s not a question of avoiding these losses, but one of how soon we will take them and get on to the process of recovery.”

Predictably, the biggest of the crooked banksters are up in arms over Hoenig's proposals and are screaming bloody murder. One of their best known shills from the axis of evil, David Jones, warned, as ominously as Condi Rice did when she told us about American cities at risk from Saddam's nuclear bombs, that "The system would melt down totally. We’d have a complete loss of confidence.” If, by the "system" he means the current boom-and-bust system where the rich and powerful benefit exclusively-- regardless of cycle-- and the rest of us are beggared... ok. And by loss of confidence, if he means the banksters... well they would lose more confidence if they were hauled off to prison and their ill-gotten gains confiscated to help pay for their malfeasance.

Still, not all banksters think the current approach is a good idea anyway. Last week, we commended GOP greed and avarice advocate and Louisiana bankster Daryl Byrd for returning the $90 million in TARP money his bank had taken (with interest). Yesterday 50 other banksters lined up for the DWT bankster commendation. Taxpayers just saved $2 billion.
The banks renouncing TARP include institutions of all sizes, from all parts of the country. New York Community Bancorp Inc., of Westbury, N.Y., turned down $596 million, which would have made it one of the top 30 TARP recipients. Landmark Bancorp Inc., of Manhattan, Kan., declined $12 million in taxpayer capital. American River Bancshares, of Sacramento, Calif, turned down $6 million.

So how should we proceed if we scrap the misguided Bush approach to propping up failure and malfeasance? A majority of Americans, according to new polling, favors nationalization of the banks, even if our stupid political class is too afraid of the word. Nobel Prize winning Economist Joseph Stigliz, former chief economist for the World bank, published a proposal in this week's Nation, A Bank Bailout That Works, that makes far more sense-- at least for the American people-- than what the axis of evil has undertaken.
It has been obvious for some time that a government takeover of our banking system-- perhaps along the lines of what Norway and Sweden did in the '90s-- is the only solution. It should be done, and done quickly, before even more bailout money is wasted.

The problem with America's banks is not just one of liquidity. Years of reckless behavior, including bad lending and gambling with derivatives, have left them, in effect, bankrupt. If our government were playing by the rules--which require shutting down banks with inadequate capital-- many, if not most, banks would go out of business. But because faulty accounting practices don't force banks to mark down all their assets to current market prices, they may nominally meet capital requirements-- at least for a while.

No one knows for sure how big the hole is; some estimates put the number at $2 trillion or $3 trillion, or more. So the question is, Who is going to bear the losses? Wall Street would like nothing better than a steady drip of taxpayer money. But the experience in other countries suggests that when financial markets run the show, the costs can be enormous. Countries like Argentina, Chile and Indonesia spent 40 percent or more of their GDP to bail out their banks. For the United States, the worry is that the $700 billion appropriated for the bank bailout may turn out to be just a small down payment.

The cost to the government is especially important, given the legacy of debt from the Bush administration, which saw the national debt soar from $5.7 trillion to more than $10 trillion. Unless care is taken, government spending on the bailout will crowd out other vital government programs, from Social Security to future investments in technology.

...The politicians responsible for the bailout keep saying, "We had no choice. We had a gun pointed at our heads. Without the bailout, things would have been even worse." This may or may not be true, but in any case the argument misses a critical distinction between saving the banks and saving the bankers and shareholders. We could have saved the banks but let the bankers and shareholders go. The more we leave in the pockets of the shareholders and the bankers, the more that has to come out of the taxpayers' pockets.

...There are a few basic principles that should guide our bank bailout. The plan needs to be transparent, cost the taxpayer as little as possible and focus on getting the banks to start lending again to sectors that create jobs. It goes without saying that any solution should make it less likely, not more likely, that we will have problems in the future.

By these standards, the TARP bailout has so far been a dismal failure. Unbelievably expensive, it has failed to rekindle lending. Former Treasury Secretary Henry Paulson gave the banks a big handout; what taxpayers got in return was worth less than two-thirds of what we gave the big banks-- and the value of what we got has dropped precipitously since.

Since TARP facilitated the consolidation of banks, the problem of "too big to fail" has become worse, and therefore the excessive risk-taking that it engenders has grown worse. The banks carried on paying out dividends and bonuses and didn't even pretend to resume lending. "Make more loans?" John Hope III, chair of Whitney National Bank in New Orleans, said to a room full of Wall Street analysts in November. The taxpayers put out $350 billion and didn't even get the right to find out what the money was being spent on, let alone have a say in what the banks did with it.

TARP's failure comes as no surprise: incentives matter. Bankers won't restart lending unless they have a reason to do so or are forced. Receiving billions of dollars in bonus pay for racking up record losses is a peculiar "incentive" structure. Bankers have been accused of unbounded greed using hard-earned taxpayer dollars for bonuses and dividends, but economists more calmly observe: they were simply responding rationally to the incentives and constraints they faced.

...There is every reason to believe that a temporarily nationalized bank will behave much better--even if most of the employees are still the same--simply because we will have changed the perverse incentives. Besides, a government-run bank might spend some time and money teaching its employees about risk management, good lending practices, social responsibility and ethics. The experience elsewhere, including in the Scandinavian countries, shows that the whole process can be done well-- and when the economy is eventually restored to prosperity, the profitable banks can be returned to the private sector. What is required is not rocket science. Banks simply need to get back to what they were supposed to do: lending money, on a prudent basis, to businesses and households, based not just on collateral but on a good assessment of the use to which borrowers will put the money and their ability to repay it.

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2 Comments:

At 7:44 PM, Anonymous Ryan said...

More than anything else, I believe that it will take fiscal discipline to get the country back on track. I don't believe nationalization is the answer. I subscribe to the "survival of the fittest" theory.

I have heard about many supposedly catastrophic collapes of banks, brokerages, etc for many months now. And everything is still moving along, haven't seen "a catastrophy" yet. Somebody else will move in to take the place of these inefficient companies.

Ryan

 
At 9:26 AM, Anonymous Anonymous said...

Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. Find out what a growing repudiate the debt movement could mean for treasuries, the dollar, gold and mining shares.

The Campaign to Cancel the Washington National Debt By 12/22/2013 Constitutional Amendment is starting now in the U.S. See: http://www.facebook.com/group.php?gid=67594690498&ref=ts

 

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