Obama’s Bank Bail Out

Martin Wolf of the Financial Times has written a pretty scathing critique of the new US Administation’s overhaul of the TARP program.  I am increasingly convinced by Duncan Cameron’s  argument that – in the US at least – the best way out is to nationalize the banks, run them as a public utility, and compensate the shareholders only if there is remaining equity after purging the books of toxic assets. The alternative is to pay too much – socializing the losses of the bankers – or to offer too little – leaving the continuing credit crisis unresolved.  Wolf’s basic point is that half measures designed to appease Wall Street are doomed to failure.  It is one thing for those on the left to be so quick to write off Obamanomics, much scarier when such a trenchant critique and call for truly radical actions comes from  such an impeccably mainstream source.

http://www.ft.com/cms/s/0/9ebea1b8-f794-11dd-81f7-000077b07658.html

2 comments

  • Nouriel Roubini makes the definitive critique of the current US thinking on the bailout and calls for nationalization:
    http://www.rgemonitor.com/roubini-monitor/255507/it_is_time_to_nationalize_insolvent_banking_systems

    I won’t bother linking to Krugman’s latest critiques of both the stimulus plan and the financial bail-out, but comes to roughly the same place.

    William Buiter and others are calling for a “good bank” solution that would wipe out the old banks and replace them with shiny, new ones:
    http://blogs.ft.com/maverecon/2009/02/good-banknew-bank-vs-bad-bank-a-rare-example-of-a-no-brainer/

    And James Galbraith has an excellent overview of what’s going on in this interview with Democracy Now!:
    http://www.democracynow.org/2009/2/10/economist_james_galbraith_bailed_out_banks

    Galbraith is well worth quoting:

    “Well, the crucial question is, on what terms does the Treasury plan to guarantee or to repurchase or to otherwise deal with the bad assets that the banks have? These assets are mortgage-backed securities. They are securities derived from subprime loans that were made in an atmosphere of regulatory laxness and complicity and fraud, basically, during the Bush administration, which came to take over the system of housing finance and to infect it with assets which nobody trusts, which nobody can value. And nobody really knows what’s in the files, what’s on the loan tapes of those—that underlie those securities. So the question that I think we need to ask is, before we issue a public guarantee, does the Treasury of the United States plan to conduct a meticulous audit of the assets that underlie the securities that they’re expecting to take off the banks’ books, so that we, the taxpayer, can have an idea of what, if anything, these securities are worth?

    And the problem is that when you—the little bit of checking that has been done appears to reveal that a very large fraction of these securities contain, on the face of it, misrepresentation or fraud in the files. And so, we are looking at an asset which nobody, no outside investor doing due diligence on behalf of a client for whom they have some responsibility, would touch. And that is the issue. That’s the problem.

    If that is indeed the case, then I think it’s fair to conclude that the large banks, which the Treasury is trying very hard to protect, cannot in fact be protected, that they are in fact insolvent, and that the proper approach for dealing with them is for the Federal Deposit Insurance Corporation to move in and take the steps that the FDIC normally takes when dealing with insolvent banks.

    And the sooner that you get to that and the sooner that you take these steps, which every administration, including the Bush administration, actually took in certain cases—replacing the management, making the risk capital take the first loss, reorganizing the institution, guaranteeing the deposits so that there isn’t a run, reopening the bank under new management so that it can begin to function again as it should have all along as a normal bank—the sooner you get to that, the more quickly you’ll work through the crisis.

    The more you delay and the more you try to essentially prop up an institution whose books have already been poisoned, in effect, by this—the practices of the past few years, the longer it will take before the credit markets begin to function again. And as I said before, the functioning of the credit markets is absolutely essential to the success of the larger package, of the stimulus package and everything else, in beginning to revive the economy.”

  • http://www.socialistproject.ca/bullet/bullet184.html

    David Harvey has an excellent article on the Bullet which brings in a good historical critical perspective.

    There is a bottomline to all this, and it basically goes something like this.

    One of the key instruments of innovation that has become a pillar in the modern economy is credit.

    It has been around since we fell from the trees but the large scale usage from a systemic
    perspective, came into being during the 20th century.

    It is this key pillar that the quoting Mr. Marx, American financiers, given the rope, hung themselves with.

    The took a key institution of the modern economy and pillaged and plundered with a reckless abandonment that usurped even that which occurred during the 20’s.

    You can talk about toxic assets, and asset backed paper and the gigantic gordian knot of what was hidden, until the stench of the rotting carcass was finally dropped from Wall street onto mainstreet.

    Shrugging shoulders and bewildering stares flooded the ideological headlights of the media and the business elite still actually doing brick and mortar activities.

    The function and institution credit had become the alter of any modern economy. And it has now been thrown into a state of dysfunction that no amount of stimulus will help rebuild the trust.

    Until we get the credit issue solved and the institution of credit fixed, we will continue to the downward spiral.

    Nationalize the banks and be done with it. However that will never happen in the US because of ideology.

    A report stated yesterday that potentially the Canadian banking model should be used. I am sure the American elites would love that, Canadian banks basically have usurped the nation state and now pretty much pour their own shots. So yes, why not use the Canadian model, doesn’t get any better than what we have for banks. Complete control.

    the bottom line is, credit as an institution was destroyed and it needs to be rebuilt and quickly. But it may just be the impossibility that historians write about that brought the whole system to a crash.

    You cannot destroy credit and then rebuild it in such a timeframe- plain and simple- I hate to be defeatist but I have to call ’em like I see them.

    It is pretty much half way to economic Armageddon already.

    Nationalizing the banks is the key to get us through the doorway into recovery.

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