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Agreed, but they would still be saddled with the bad assets they acquired during the bubble, so new regulations alone are clearly insufficient, unless you advocate that the public, via the government, relieve them of those bad assets.  While they are insolvent they remain impaired in their ability to extend needed credit.

New banks, created as I propose, and operating under competent regulatory schemes, would be able to finance ongoing economic activity and pick up the slack left by impaired banks.

But this is shifting the ground ... it was framed as not putting it in the hands of the bank managers who had failed, rather than being a balance sheet problem.

I don't see how the balance sheet of the private banking system is fundamentally different ... how the new capitalization to allow newly established banks to lend somehow free of interaction with existing banks and their crappy balance sheets is any different from the re-capitalization of the existing banks.

The way the banking system works as a system is that purchasing power flows from one bank to the other and the temporarily liquid institution lends its liquidity to the temporarily illiquid institution, and what you seem to be describing is a system that only functions in terms of liquidity when liquidity has flown to insolvent institutions, who would of course be happy to lend it at very short terms to the newly founded solvent institutions. If the liquidity has flowed to the solvent banks, why will they lend to the insolvent banks?

Sharply curtail the ability of existing banks to play speculative games, force bank holding companies to be organized so that their commercial banking subsidiaries can be bailed out individually while allowing the bank holding company to fail, eliminating the "too big too fail" moral hazard, re-capitalize the system with a permanent public equity stake, which since it will act as a tax on finance sector firms during normal times that is automatically not collected during serious downturns acts as an automatic stabilizer, and throw substantial new real paying business the way of the Main Street oriented part of the finance sector with a massive crash program to construct a New Energy Economy.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Oct 3rd, 2008 at 12:00:00 AM EST
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