Create a “good bank”

An oxymoron for out time?

Joseph Stiglitz recently defended a bank nationalization program. He made his defense on the grounds that many banks are now insolvent, that transparency is lacking, that funding a bailout program such as the Bush and Obama administrations have will necessarily be too costly for the taxpayer and, finally, that the costs specific to any resolution to the financial crisis should be paid by the bankers and shareholders, not the taxpayers. His solution: Create a "good bank" by stripping the viable assets from the banks known to be insolvent, thus leaving the diminished banks with a project of making do by peddling their trash on the market.

Bank nationalization

A recent Thomas Ferguson and Robert Johnson article advocated the adoption of a failing bank nationalization scheme akin to the one implemented by Sweden in 1992. They pointed out that this strategy would be the simplest and cheapest to implement. It also would stand a chance of succeeding, unlike the "throw vast sums of money at the problem" technique championed by the recently departed Paulson and Bush. A nationalization program is not flawless, however: Nationalization could provide the well-connected hedge fund or equity firm an opportunity to loot the public if the bank nationalization program fails to include adequate controls. Oversight and accountability were conspicuously absent from the TARP program. It would also help matters if the sun were allowed to shine on the workings of this national bank, especially since publicity was also lacking in Paulson's program.

Ferguson and Johnson conclude by noting that:

Temporary nationalization of banks is, indeed, the best way for the United States to avoid ending up with a "lost decade" like Japan in the 1990s. It gets the toxic waste out of the system, and not by robbing the public, making possible the resumption of economic growth. But without stringent safeguards on assets sales and vigorous anti-trust regulations, new rounds of financial pathology will become inevitable.

Some financial crisis links (10.2.2008)

In a recent article Paul Crag Roberts sensibly claims that

If foreign creditors are to finance the bailout, it must be credible. The best way to achieve credibility is to combine the bailout with a reduction in other forms of US foreign borrowing, specifically the US government's budget deficit and the US trade deficit.

He continues

The bailout would gain credibility if the US budget and trade deficits were addressed as part of the package. The US government needs to choose between its financial system and its wars. As the wars serve no US interest except for those of a few powerful interest groups, the government should declare an immediate end to the wars, thus reducing the budget deficit by at least $200 billion annually.

The government should then turn to the military budget, which at about $700 billion is larger than the combined military spending of the rest of the world combined. The only justification for such an enormous amount of military spending is a policy of US world hegemony, a policy that financial collapse makes nonsensical. The defense budget needs to be cut sufficiently to bring the US budget into balance or, better still, into $100 billion surplus.

Such action would demonstrate to foreign creditors a responsible approach to the economic crisis. Instead of more than doubling the demands for new credit from foreign creditors, the US government could keep the current level of borrowing constant by eliminating the budget deficit. This would signal a new seriousness to foreign lenders.

The nonsensical nature of the Senate bailout package appears with great clarity when one considers it in light of Robert's prudent suggestions. Why, after all, would America's political elite believe even for a moment that the rest of the world would fund extravagances of this sort? They could believe such a thing only if they were deluded…. And deluded they likely are.

Mike Whitney wonders

For nearly a year, we have been asking ourselves why the investors and foreign banks that bought up hundreds of billions of dollars of worthless mortgage-backed securities (MBS) from US investment banks have not taken legal action against these same banks or initiated a boycott of US financial products to prevent more people from getting ripped off?

One compelling answer emerged during an interview Larry Kudlow had last evening with Representative Brad Sherman. A partial transcript can be found in Whitney's article:

"It (The bill) provides hundreds of billions of dollars of bailouts to foreign investors. It provides no real control of Paulson's power. There is a critique board but not really a board that can step in and change what he does. It's a $700 billion program run by a part-time temporary employee and there is no limit on million dollar a month salaries....... It's very clear. The Bank of Shanghai can transfer all of its toxic assets to the Bank of Shanghai of Los Angeles which can then sell them the next day to the Treasury. I had a provision to say if it wasn't owned by an American entity even a subsidiary, but at least an entity in the US, the Treasury can't buy it. It was rejected.

"The bill is very clear. Assets now held in China and London can be sold to US entities on Monday and then sold to the Treasury on Tuesday. Paulson has made it clear he will recommend a veto of any bill that contained a clear provision that said if Americans did not own the asset on September 20 that it can't be sold to the Treasury. Hundreds of billions of dollars are going to bail out foreign investors. They know it, they demanded it and the bill has been carefully written to make sure it can happen."

In short, America must pay the quid pro quo needed to keep many of its rentier capitalists out of court if not also jail!

After identifying some of the debilitating effects of America's post-1980s economic policy choices, including those generated by the massive amounts of capital flowing into the country, Madris Senner suggests that

Washington needs to collar Wall Street, not further indulge it. Wall Street was the architect in creating the financial structures, products and the liquidity that was necessary to enable large sums of money to breech our borders. For its collaboration Wall Street has profited handsomely, from the shill selling stocks, to foreign exchange traders, to participants in the US bond & money markets, to investment bankers, to the mutual fund industry to players in derivatives markets and all have profited from the financial invasion of the US.

Senner then concludes

If the financial system is an integral part of our well being and national security, then the government should move swiftly to seize control of banking institutions and remove our vulnerability to the whims of foreign central banks and speculators. We need to nationalize financial institutions to insure that they act in America's interest, not their own self-interest that has no allegiance except to the bottom line.

The nationalization option

The economist Brad DeLong advocates the nationalization path on his blog (via TPM):

It might work like this. Congress:

• grants the Federal Reserve Board the power to take any financial firm whatsoever with liabilities and capital of more than $25 billion that is not well capitalized into conservatorship
  
• requires the Federal Reserve Board to liquidate any financial firm in its conservatorship when it judges that the firm is insolvent (paying off in full or not paying off in full the liabilities of the firm at its discretion), unless
  
• the Federal Reserve Board finds that preservation as a going concern is in the interest of the taxpayer, in which case Congress
  
• grants the Federal Reserve Board the power to transform equity stakes in the firm into junior preferred stock at par value and then transfer ownership and custody of the firm to the Treasury
  
• requires the Federal Reserve to terminate conservatorship if the firm becomes well-capitalized once again.
  

In addition, Congress:

• grants the Treasury the power to issue up to $500 billion of troubled asset redemption bonds, the proceeds of which are then to be loaned to the Federal Reserve to be used to cover the liabilities of those liquidated firms that the Federal Reserve judges it is in the interest of the taxpayer to have their liabilities paid off in full.
  

With all thanks due to market fundamentalist prejudice, deeply entrenched business interests and the lack of a nationally viable opposition party, the nationalization option seems to be quixotic. It is unlikely to come up for discussion.