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... "bad apple" excuse for corporate behavior.

The banks behave the way that commercial banks have always acted when permitted to. If we set up new banks and permit them to behave the way we permitted the existing banks to behave, sooner or later they will recapitulate a banking panic ... if we remove the license from the current banks to behave the way they have been behaving, they will go back to the boring business of banking, again.


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 Thu Oct 2nd, 2008 at 08:20:51 PM EST
[ Parent ]
If we set up new banks and permit them to behave the way we permitted the existing banks to behave, sooner or later they will recapitulate a banking panic
Agreed, of course, and in most of my statements of the proposal I have emphasized the need for a return to something more like 70s regulations.  But you would only respond to some tertiary point if at all to those comments. :-)

... if we remove the license from the current banks to behave the way they have been behaving, they will go back to the boring business of banking, again.
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.  Why is this not an appropriate thing for Congress and the Administration to do in the public interest?  I can see that it would be disadvantageous to existing banks, especially those impaired by toxic assets. TFB!  I can also see that this would, in effect, free the Main Street or real economy from being held hostage to Wall Street, as I believe Paulson is doing.  I can see that it would be strongly opposed for those reasons alone.  Can you comment on the substance of the proposal.  I am particularly concerned about any specific that would render it unfeasible and about consequences I don't foresee.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Oct 2nd, 2008 at 11:22:37 PM EST
[ Parent ]
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
[ Parent ]
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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