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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.
It is shifting the ground back to the question I asked, which is not in your frame.

I don't see ... 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 difference is the taxpayers get the benefit of new credit to the economy without first having to pony up the capital to "recapitalize" the existing banks.  It would have the advantage of offering a clear view of what is the necessary cost of winding up an insolvent institution and insuring that the public does not bail out stock or bond holders. It would have the added advantage of creating new, healthy institutions that could buy up viable assets of banks that could be allowed to go out of business due to insolvency.

If, other than those trivial practical differences, there are no other significant differences, I will be very pleased.  I see no reason why this scheme could not enjoy all of the advantages enumerated in your last paragraph while administering a healthy dose of "market discipline" just where it will do the most good.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 3rd, 2008 at 12:33:39 AM EST
[ Parent ]
... yours here:
Can this be done without creating new, uncontaminated banks to supply credit that has been destroyed by incompetence?

I don't presume incompetence to be at issue. Banking systems operating without little or no regulation always end up have serious banking panics, destroying a large amount of credit.

Whenever there is a systemic problem, those who have been less well managed have a greater likelihood of being on the chopping block, but if all banks had been run more competently, we still would have seen roughly the same result, though perhaps with some reshuffling of the list of which institutions went under when.

On this:

The difference is the taxpayers get the benefit of new credit to the economy without first having to pony up the capital to "recapitalize" the existing banks.

... as it seems likely it would be more capital overall required to capitalize these banks sufficiently that they are not dragged down as the existing banking system collapses around them, it seems that this difference is that providing more capital for an equity stake in newly established banks feels better than providing less capital for an equity stake in existing banks.

The difference is the taxpayers get the benefit of new credit to the economy without first having to pony up the capital to "recapitalize" the existing banks.  It would have the advantage of offering a clear view of what is the necessary cost of winding up an insolvent institution and insuring that the public does not bail out stock or bond holders.

The proposal in the diary does not bail out stock holders ... it dilutes their equity by from 100% to 200% of the amount of shaky assets taken out of the system, and creates a permanent tax on gross corporate profits.


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 11:41:04 AM EST
[ Parent ]
Thank you for your response, Bruce.
...it seems likely it would be more capital overall required to capitalize these banks sufficiently that they are not dragged down as the existing banking system collapses around them...
I fail to see how it is less expensive to provide capital to new, uncontaminated banks than it would be to first cover all of the losses and bad bets of existing banks and then provide the capital to re-capitalize them. And how would anyone know if all the bad assets had been identified when they were re-capitalized.  Please explain.

I don't understand why new banks would not be more resistant to being dragged down by existing banks than are existing banks.  All of their business would be conducted under more conservative banking regulations and there should be a lot of very experienced, sadder but wiser bank officers available to staff such institutions.  In the current climate most such officers would be very glad to have good paying employment, acutely aware of the consequences of playing fast and loose with the rules and constrained with the possibility of legal consequences for future bad behavior.  They might no longer have the prospect of doubling their personal wealth in three years from their work, but they would have good salaries and benefits.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 3rd, 2008 at 12:03:09 PM EST
[ Parent ]
I fail to see how it is less expensive to provide capital to new, uncontaminated banks than it would be to first cover all of the losses and bad bets of existing banks and then provide the capital to re-capitalize them.

Its not necessary to cover all of the losses and bad bets of existing banks. Much of the losses and bad bets are in the range of bank equity, and its not necessary to cover bank equity for the bank to remain solvent.

But push the institution over the edge, its bonds suffer a hit, and now there are more financial firms that were previously solvent who are pushed toward insolvency ... and at the same time as liquidity in the system takes a hit, so even firms who could work their way back to solvency face difficulty staying in business long enough to do so.

Indeed, on the part of the ABC "AM" news radio coverage, from Austalia, on "the impact of the US banking crisis "over here", the interviewer was prodding a politician (either the PM or Treasurer, I forget which) on whether Australia really was in better shape than the US and UK, the "scare figure" was that a certain banks balance sheet showed derivatives and structured vehicles amounting to 70% of shareholder equity, which means they could all go bust, and the bank would still be solvent.

And saying "covering losses and bad bets of existing banks and then providing the capital to re-capitalize them" is double counting ... the covering of the losses and bad bets necessary to remain solvent is the capital that is re-capitalizing them.


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 12:16:23 PM EST
[ Parent ]

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