New Banks Needed #1 August 25, 2020
Banks are capital constrained. Balance sheets are loaded up with problem debt. Future losses are embedded in booked exposures. The banking sector is not sufficiently healthy to support economic expansion or to reverse deflationary pressures. So the question is how do we evolve? The government has propped up the banking sector, believing systemic impacts of bank failures would trigger a tidal wave of further liquidity contraction and trigger depression. The propping up has not worked. Yes, it has prevented a massive financial system collapse, but it has not supported economic growth. We need creative destruction in the banking sector. Let these existing banks reap the rewards of their policies. Create new banks with new fresh capital, unencumbered by toxic assets, headed by wise risk managers, but ready to lend.
So the question is how do we evolve? The government has propped up the banking sector, believing systemic impacts of bank failures would trigger a tidal wave of further liquidity contraction and trigger depression. The propping up has not worked. Yes, it has prevented a massive financial system collapse, but it has not supported economic growth. We need creative destruction in the banking sector. Let these existing banks reap the rewards of their policies. Create new banks with new fresh capital, unencumbered by toxic assets, headed by wise risk managers, but ready to lend.
New Banks Needed #2 August 31, 2010
The gist of what I am saying is this and is really not controversial. * Banks have embedded losses on their balance sheets * These imbedded losses impact profitability and capital * Because risks in the economy are large, banks are exceedingly careful about lending. * On an individual bank level, this is appropriate. * In aggregate, this reduces growth or recovery potential * This is in line with the "Zombie Bank" discussions that were all over the place during the depth of the financial crisis, which predicted just what we have going on today. * The Fed policy of low rates and other regulators complicity in "extend and pretend" does not solve this dilemma. It simply prevents the clearing of the market for financial assets and the development of new robust financial institutions that are capable of taking on risk. * New banks with new capital are needed. They would not be encumbered by imbedded bad assets or dependent on a super low rate environment. New banks would also provide the opportunity to shed the predatory financial model that imperils our future. The ability of bankers to be in denial about the state of affairs and to argue for the status quo is not a reason to believe them. That's it.
* Banks have embedded losses on their balance sheets * These imbedded losses impact profitability and capital * Because risks in the economy are large, banks are exceedingly careful about lending. * On an individual bank level, this is appropriate. * In aggregate, this reduces growth or recovery potential * This is in line with the "Zombie Bank" discussions that were all over the place during the depth of the financial crisis, which predicted just what we have going on today. * The Fed policy of low rates and other regulators complicity in "extend and pretend" does not solve this dilemma. It simply prevents the clearing of the market for financial assets and the development of new robust financial institutions that are capable of taking on risk. * New banks with new capital are needed. They would not be encumbered by imbedded bad assets or dependent on a super low rate environment.
New banks would also provide the opportunity to shed the predatory financial model that imperils our future. The ability of bankers to be in denial about the state of affairs and to argue for the status quo is not a reason to believe them. That's it.
We are now starting to get reports of credit worthy borrowers having difficulty financing homes and Wall Mart having set up a business brokering Small Business Agency loans to creditworthy business borrowers, so there is likely a market, but our government likely will put the desires of the TBTFs ahead of any move to actually help main street. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
