End The Bank Bailout Charade

Paul Krugman, Greg Mankiw, Nouriel Rubini, and most credible observers of the banking crisis on all sides of the political spectrum agree that the federal responses under both Hank Paulson and Tim Geithner have not and will not work. There is emerging consensus that the only realistic solution to the credit crisis is to do what current banking law actually requires – have regulators take over insolvent banks, break them up and sell off whatever of value may be left.

Yes, in the case of some of the largest of the insolvent institutions, this responsible solution will have severe implications for all the worldwide counterparties to all the complex financial shenanigans that the big banks have engaged in for the last decade or so. And yes, it will likely cause things to get worse and more complicated economically for a while, before they get better. Unfortunately, it is becoming obvious that postponing the inevitable only postpones the pain and makes the current recession longer and deeper. It will be better to just get it over with.

But all the top government officials deciding these matters, from both the Obama and Bush administrations, seem to be making their decisions not based on either law or rational economics, but rather  on personal ego. Having all made their careers in giant consolidations of the Wall Street finance environment, the idea of Citibank, Bank of America and other venerable giants going down on their watch is truly abhorrent to these regulators.  Having thrived in the environment where the “efficiencies” of global finance were seemingly obvious, it is hard for them to move from that now clearly failed paradigm to the reality very obvious to most of us: Those institutions have grown to have a very negative net impact on the real economy, on our financial system and on our political culture. They are not “too big to fail”. In fact, they are far too big to exist.

Like a woodcutter who views every problem from the perspective of how it can be solved with his ax, or an excavation contractor who brings in heavy equipment to address challenges better solved with hand tools, the folks holding the levers of our economic policy seem to view the large banks as the only meaningful tool in their tool box.

So, rather than implementing the solutions that federal banking regulations really require at this point, they raise the scary rhetorical specter of “nationalization”, while pouring hundreds of billions of tax payers dollars into propping up insolvent financial institutions with the worst possible solution, putting all the risk on tax payers while leaving any possible benefits remaining in those failed institutions in the private hands of the folks who got them into the mess that they are in.

An interesting Gallop poll on bank takeover finds that depending on whether or not scary sounding rhetoric like “nationalization” is used, public opinion swings from majority opposed to a majority in favor of responsible federal action on the banking crisis.

Mr. Geithner, Mr. Bernake and President Obama really have to accept the inevitable, step up to the plate and do what needs to be done. With Citibank now trading in penny stock territory, the charade that these failed institutions have a beneficial role to play in our future is over.

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1 Comment

Filed under Economic Policy, Fundamental Perspectives

One response to “End The Bank Bailout Charade

  1. fredunger

    Alan Blinder offers an interesting counterpoint to the attractiveness of actually enforcing banking regulations and taking over failing banks. Specifically he points out that the banks that barely squeak past the threshold of what he not surprisingly labels “nationalization”, will become targets for short sellers on Wall Street and thus pushed into major problems by the takeover of their weaker competitors. And he suggests that they will be forced to pay higher interests and incur a higher cost structure in order to be attractive to depositors than their newly government backed and cleaned up competitors. Whole thing here: http://www.nytimes.com/2009/03/08/business/08view.html?th&emc=th.

    One thing nobody can question is that the lack of appropriate banking oversight when Mr. Blinder himself was vice chair of the Federal Reserve has created a huge mess in our economy.

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