A better model for a fair solution to the incipient solvency problem is the Reconstruction Finance Corporation, or RFC, of the 1930s. This was one of the most powerful and effective of the agencies created to cope with the greatest U.S. financial crisis ever. When financial losses have been so great as to run through bank capital, when waiting and hoping have not succeeded, when uncertainty is extreme and risk premia therefore elevated, what the firms involved need is not more debt, but more equity capital."
The article describes the RFC thus:
Consider two models for government assistance. The first is the Resolution Trust Corporation ("RTC") model of the 1980s, which was used to buy up bad assets following the S&L crisis of the 1980s. The older model comes from the 1930s and the Reconstruction Finance Corporation ("RFC"), the most authoritarian federal agency that has ever existed in the United States. Directed by Jesse R. Jones, the RFC used its vast legal powers to test the solvency of banks and commercial companies and, when those institutions were proven solvent, they were allowed to re-open. Those financial institutions that were determined not to be solvent were closed by the FDIC and either sold whole or in pieces to other institutions. Below are two very simplified numerical illustrations to highlight the failings of the current plan in Washington by way of a comparison between (1) the RTC/Paulson model and (2) the 1930s RFC model, which is conveniently illustrated by the purchase of WaMu by JPMorgan Chase (NYSE:JPM). Of note, in the WaMu resolution, equity and bond holders of the parent holding company were effectively wiped out - a significant landmark for bank investors that probably kills the private market for bank equity for the foreseeable future.
Below are two very simplified numerical illustrations to highlight the failings of the current plan in Washington by way of a comparison between (1) the RTC/Paulson model and (2) the 1930s RFC model, which is conveniently illustrated by the purchase of WaMu by JPMorgan Chase (NYSE:JPM). Of note, in the WaMu resolution, equity and bond holders of the parent holding company were effectively wiped out - a significant landmark for bank investors that probably kills the private market for bank equity for the foreseeable future.
Temporary nationalization is a non-starter ...
Maybe the difference is in the spelling, but temporary nationalisation is exactly what Her Majesty's Treasury appears intent on doing this week with Bradford & Bingley.... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Add to that the fact that the corporate wing gets legislation and the veneer of expertise handed to them by their corporate backers, and House progressives are mostly forced to come up with things on their own, and the outside advice they do get includes things as politically dead on arrival as temporary nationalization of banks, and its not wonder that the progressive wing of the House Democrats do not have a horse in the race. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
... but by all appearances the Bush administration was perfectly happy with nationalizing businesses to bail them out ... the opposition would be in the Senate, and somehow I do not imagine the House of Lords presenting such a hurdle for a UK government to get over.
The problem is certainly not that the policy is guaranteed to fail if enacted ... while the devil is in the details, its one of the main lines of approach for a government addressing a solvency crisis.
If an academic wants to make the point, "this is a solution that can work, and look how its being ignored", that's a fine lesson on the limits of the political discourse in American today ... but that's different from making a policy proposal that you hope to see adopted. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
