Three critics call for restructuring but one would transform the system

There is the issue of moral hazard. By bailing out banks, the government is rewarding bad behavior. With taxpayer money and without restructuring, these zombie banks continue to be run poorly, and lending stays sluggish.

Nevertheless, Treasury Secretary Geithner intends to create a public-private investment fund that will use government dollars to insure private investors against losses they could suffer from purchasing bad bank assets.

Instead of letting banks sell them off in an attempt to hide the depth of their losses, the government should acknowledge those banks are insolvent, wipe out the shareholders, fire most of the executives, reorganize it, soak up the assets that are nonperforming and sell them later.

We are being played for chumps. The Bush administration made us the "fool" by massively overpaying for assets. The Obama administration is about to compound that scandal with a "guarantee". The bankers that caused the crisis designed both programs.

The contract that holders of bank stock made was that they would get nothing if the bank failed. It has failed. Yet the Bush and Obama plans reward stockholders who are primarily the wealthy.

The Obama administration’s limits on CEO compensation are political cover. Remember, the compensation systems used for appraisers, accountants, and rating agencies rewarded bad ethics. It set up a "Gresham's dynamic" in which fraudulent and abusive lending and accounting drove good practices out of the marketplace.

The Bush and Obama plans retain existing managers that have incentives to cover up toxic assets and not recognize losses and to make bad or even fraudulent loans that show the greatest fictional accounting income. Instead, government could hire any of the unemployed bankers who lost their jobs for refusing to make bad loans. They would evaluate how much toxic assets are worth. That reduces acquisition risks, which expands the number of bidders, raises bids, and shrinks the bill to taxpayers.

While expensive, it’s less costly to have the Federal Deposit Insurance Corporation (FDIC) pass failed banks through receiverships on Friday at the close of business and reopen them as "New Federal" banks Monday morning with minimal disruption to customers and creditors. This is how the Reagan administration dealt with failed S&Ls (for half a trillion, not multi-trillions). We should stop listening to the folks that have interests hostile to ours.

A "bad bank" to buy the toxic assets that TARP couldn't cure? There already is a "bad bank" -- the Federal Reserve. It has grown from $900 billion to more than $2 trillion since this crisis began. Projected losses from bad loans are enough to wipe out banks' capital. Some banks have liabilities 40, 60, or even 100 times the amount of their capital.

With covering that, add in the unfunded liabilities of the Medicare and Social Security. Governments, corporations, and households are groaning under unprecedented debt. Average household debt has reached 141% of disposable income in America and 177% in Britain.

Let’s restructure banks that are de facto insolvent. Shareholders lose but should have kept an eye on the people running their banks. Bondholders may have to accept a debt-for-equity swap or a 20% "haircut". Recapitalization must be a once-only event, with no enduring government guarantees or subsidies. And there should be a clear timetable for "re-privatization", within, say, 10 years.

Also, convert mortgages to lower interest rates and longer maturities. Fannie Mae and Freddie Mac could offer all borrowers cheaper loans. Lower monthly payments for a majority of households would do more than the stimulus package, including tax cuts.

Ironically, the only policies that are politically correct -- more government money for banks and for reflating house prices -- make the situation worse. Banks use the money to buy out smaller banks, and the subsidies keep houses unaffordable.

For more, Wall Street needs asset prices to not only rise but also fall, over and over. The more frenetic the price fibulation, the easier it is for computerized buy-and-sell programs to make money on options and derivatives.

Operating in an economy that is all loaned up, investors demand a “bad” bank public/private partnership (PPP). It’s to be capitalized by private investors (with the money they’ve received from the government). Its bonds will be guaranteed by the public (socializing the risk).

It will renegotiate mortgages, down from an original, say, $500,000 to $250,000. Families can stay in their homes, but when they sell or renegotiate, the capital gains go to the PPP. If the property sells for $400,000, the “Savior Bank” gets $150,000. Thus the bank will make much more through capital gains than as interest!

There is an alternative to ward all this off. A debt write-down, followed by a tax on land. Then the “free lunch” of rising land prices could replace the income tax on labor and capital.

A location tax would prevent housing prices from inflating again. No longer could speculators and lenders capitalize property prices into higher bank loans. This would save homeowners from taking on so much debt, and it would save the economy.

Also see:

G. F. Will -- What has government become?
http://www.progress.org/2008/gfwill.htm

Bankruptcy or Bailout to Nowhere?
http://www.progress.org/2008/cronyism.htm

ed Keeps $2 trillion secret, Goldman Sachs shorted its sales
http://www.progress.org/2008/reserve.htm

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Three critics call for restructuring but one would transform the system

Will creating another government lender enrich the rich?

by Brad Reed, by William Black, by Niall Ferguson, and Michael Hudson

Three critics call for restructuring but one would transform the system Will creating another government lender enrich the rich?

by Brad Reed, by William Black, by Niall Ferguson, and Michael Hudson

Three critics call for restructuring but one would transform the system

Will creating another government lender enrich the rich?