How to Detoxify the Banks

The Weekly Standard ^ | March 6, 2009 | Jim Prevor

[JimPrevor]

The Bush and Obama administrations have shared an unwillingness to see any of the major banks go under, hence the problem we have in solving the current banking and financial crisis. Though both presidents pointed to an alleged systemic risk to the economy owing to the size of the big banks, it is probably also true that any administration would be sensitive to the enormous weight these institutions carry as symbols of American prosperity, influence, and power. A collapse of Citigroup, for example, would be seen by many as an economic equivalent to the collapse of the World Trade Center.

At the same time, there is no great constituency in America for nationalizing banks in America, and there is obvious risk that, if nationalized, such banks would be run for political purposes. Other proposals--to launch new banks, for example--are not serious responses to the scale of the problem.

Happily, there is actually wide consensus on what needs to happen, and the solution is simple. In fact, Hank Paulson almost had it right. Since there is no stomach for seeing giant banks fail, the need is to separate the "toxic waste," or the damaged assets these banks carry on their books, from the good assets. This was the idea behind the original Paulson plan, the Troubled Asset Relief Program or TARP.

The Paulson plan foundered on this unavoidable fact: If the Treasury bought damaged assets from the banks at fair market value, the banks would be revealed as insolvent; if the Treasury overpaid for the assets, so as to make the banks solvent, the shareholders would unfairly benefit.

[JimPrevor]

Efforts by both the Bush and Obama administrations to save the banking system have failed to restore confidence. This piece suggests an alternative strategy that would end the cycle of bailout after bailout. The key: Change the perspective from buying "toxic assets" to buying operating assets.

[KoRn]

"A collapse of Citigroup, for example, would be seen by many as an economic equivalent to the collapse of the World Trade Center."

The nation survived the collapse of the WTC. It would also survive a collapse of Citi. Our country DID manage to find a way to live without Citi for many many years before Citi existed, and after some initial pain we would get along just fine without it.

[Carling]

Well, my mortgage, after many transfers that is out of our control, is with Citi. We have never once missed a payment, we have a 5.25% 30-year loan with 20% down on an affordable $300k house in Portland,OR, considering the market, and we pay our taxes.

We had no choice in Citi backing our loan after many transfers. I’m not sure what the WTC has to do with your comparison. Please elaborate.

[Vet_6780]

An executive order is needed to stop the meltdown.

Outlaw all naked CDS and force the rest to be exchange-traded.

Do this NOW, or the Dow will see 2000 before the end of the year.

[org.whodat]

"The Paulson plan foundered on this unavoidable fact:

That part is true, the balance is BS, they could not buy the toxic assets because there were more out there than the output of the world.

http://www.marketoracle.co.uk/Article6756.html

[org.whodat]

Reverse, Gramm-Leach-Bliley Act of 1999 and the CDS, slipped in by republicans.

[semantic]

Your thesis is incorrect. There is a significant constituency that benefits from the ownership of the FIRE means of production: the welfare state itself.

By owning banks, insurance companies and real estate (ie Fannie/Freddie), the central government controls the very source of tax receipts that allow it to fund its primary directive: expanding state benefits to satisfy Obama's electoral supporters.

How else will BHO finance both health care & energy (cap & trade) without resuscitating the very economic underpinnings which has fueled the growth of government over the last 20 years?

Until people begin to study & understand why the FIRE economy was nurtured and given special legal protections, they will continue to fail to understand the nature and reason for the various bailouts and continued efforts to re-ignite a credit driven consumer bubble.

It's all about moving the ball forward - current economic issues are just a deflection away from the real goal: health care and economic direction & control via energy cap & trade programs.

[Jim Noble]

Notice how those "in the know" portray the major problem as how to keep up the lies.

And when they admit the truth - inadvertently - that the money's no good and that the financial system is insolvent - they use apocalyptic language, like "Poland is going to fall" or "the end of everything".

Money systems come and go. This one has had a remarkably good run, considering its fundamentally fraudulent nature - but now it's time to wrap it up and start over.

This has happened many, many times in world history, and the only thing it's usually the end of is the wretched lives of the lying fraudsters who bring about the massive loss of savings.

When people speak about Poland falling, if they're not talking about Nazi tanks and execution pits, but rather the closure of the Dolce & Gabbana store in Warsaw, it simply reflects how far gone most people are.

[Huck]

If we have a president we could trust, letting the banks fail, then taking them over, cleaning them out, and turning them loose would be the solution. The problem is we can’t trust this administration to do it.