The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is nationalization.
As free-market economists teaching at a business school in the heart of the world’s financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner’s recent plan to save it has many of the right elements, it’s basically too late.
The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion — including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans — is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.
“…The U.S. banking system is close to being insolvent”
Flawed premise. There is no evidence that this is true. What is true is that there are many poorly managed banks out there and these should fold and assets be allocated to well run banks. There are good banks out there ready and willing to help.
Nazi-fication of the banks is not an option.
Don
There are almost 600 trillion of worthless derivatives and CDOs globally. The world GDP is only about 60 trillion. Most of this happened on the Boomer watch.
Insolvent banks need to be nationalized and their shareholders wiped out. It will come eventually, but if it comes sooner, rather than later, the burden to future generations in hyperinflation and debt will be much greater.
Nobody complained during the long bull market when leverage made America feel wealthy. This is the reverse side of that leverage.
There is no way either the US or the world can avoid this Depression. We can only avoid taking our children and grandchildren and greatgrandchildren with us into disaster.
The Boomers should, as a generation, for once in their collective lifetimes, think about the generations who follow them, rather than selfishly failing to take responsibility for their mistakes.
“It will come eventually, but if it comes sooner, rather than later, the burden to future generations in hyperinflation and debt will be much greater. ”
That should be “if it comes later rather than sooner”
Doh.
“Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.”
Then let them drop.
The author of this piece seems to be so wrapped up in the symptoms of this problem that he’s not seeing the cause. The symptoms? Loans are losing their value, causing lenders to go under. The cause? Too much debt, plain and simple. And our government is the worst offender out there when it comes to careless spending. Separating “good debt” from “bad debt” in an effort to make room for more debt won’t fix the fact that we just have too much debt floating around.
We’re all comrades now!
If you just “let them drop” there will be a run on the banks, and the good banks will be wiped out, along with the bad, crashing the financial system. We do still need banks. Most of us couldn’t get along with simply handing our wiget factory employees a couple tons of widgets each month and telling them to go barter for food and rent.
However, (as the author explains) nationalizing the bad banks, should then be followed by wiping them out. This means that the shareholders and administration of bad banks will be wiped out, not everybody. And we will end up with a very much smaller banking industry that is still working.
#5 – thanks for throwing in the predictable reference to communism.
Now, back to reality.
The article describes how Sweden nationalised their bad banks, cleaned them up, and then re-privatised them. That sounds like regulated capitalism to me, not communism.
Sounds like the one and only way to avoid a 30’s-style depression. And I’m a banker.
There’s a good reason Roubini is called “Dr. Doom.”
Perhaps he and Richardson have a point. It’s possible – who knows. But, I do wonder if these other asset-backed products were as mis-rated and mis-structured as were MBS. Certainly, there are signs commercial MBS are going down the drain to an extent, but the bubble in residential housing prices, which drove the behavior in the residential MBS market, was unique to an extent (at least until summer ’08). How much more will the recession deepen?
We may be in very bad trouble. There are many indicators that suggest so. When you consider the asset-backed security market provided the bulk of financing and has now virtually disappeared, you think that’s a hole that can’t ever be filled just by the banks (contrary to what the politicans tell you, bank lending is up, it’s just not enough, because they were no longer providing the majority of debt financing). Still, part of me says that when so many people are tearing their shirts and crying, “Armageddon,” things may have turned for the better. I do believe in anti-crowd psychology.
#5 – you’re welcome.
I was a banker as well, before I got into law; my wife was with FSLIC -> RTC -> FDIC before she went on to educating children. The way to deal with this is to go back to the RTC example:
http://www.ibdeditorials.com/IBDArticles.aspx?id=318039851523680
I remember the failures of the 70’s and 80’s and am not real thrilled by the glee over all becoming socialists – see the current Newsweek cover – command economies are not the solution.
I can’t comment on the other commercial real estate.
However I do know that medical office/hospital space is as grossly overbuilt as was residential housing.
Fifteen years ago, the smaller city I live in was well served by a single medium sized, rather shabby looking regional hospital and a small shabby woman’s/babies hospital. Then with easy credit both hospitals began a bidding war to add more and more services, so as to “acquire market share”. Both hospitals built more and more additions so that they are now both gigantic, gleaming behemoths, loaded with debt who compete in every service. The population has grown only modestly, but they both have tripled in size and all their equipment is up to date. Both boast vast expanses of glass fronting, atriums etc. I keep thinking “Temple of Apollo” whenever I see them.
In my previous city, (to which I will return) fifteen years ago there was a mid sized community hospital who mostly saw the poor, a largish regional hospital who dealt with trauma and everything else, and a VA hospital. Now there is there are two gleaming for profit hospitals, the community hospital has loaded up with debt to “keep up” and also boasts gigantic atriums and glass fronted towers (and has trouble seeing the poor who are still with us) and the regional hospital has likewise loaded up with debt to “attract better insurance” with brand new hospital wings and office space and has trouble taking care of trauma.
I left because the administration was insisting on taking on even more debt to build a gleaming physicians office building, complete with glass roofed atrium and greenhouse, and wished the physicians to take personal responsibility for the mortgage if they wished to stay in the city. (Geographical restrictions forbid you to practice within 30 miles if you leave). I begged to be excused the physicians office building, pointing out that I had a overwhelmingly medicaid/medicare population, that there were no other neurologists in the area who would see my population, and that I would be happy to work out of a trailer where I would have no trouble covering my overhead. Did I mention that the purpose of the hospital was to serve the poor? When they insisted that I personally sign the mortgage and move into their gleaming building, I left. (I understand that the physicians who stayed are discussing bankruptcy proceedings).
The city I was in in 1999 had two hospitals, both good sized community hospitals, but both as I left had taken on debt to build an additional gleaming “North” Hospitals to attract wealthy suburbanites who were settling in suburbs north of the city. The North Hospitals were literally (I kid you not) built accross the street from each other. Currently that northern indiana, rust belt city, (which has been steadily losing population) is served by 5 hospitals plus an inpatient rehab unit where previously a larger population had been served by 2 hospitals.
Now think about all those strip malls that you pass on your way to work. Do the math.
Thanks for the link, William P. Sulik #9. When Investor’s Business Daily and President Obama both have the same idea — a Bad Bank, like the RTC which cleaned up the S&L;crisis of twenty years ago — then this is “bipartisanship” that might just work. Get the bad assets out of circulation, and let banks fail if they have to, and let good banks survive.
I think that most people – 99.999% – are probably underqualified to judge the current depth of the problem, which is why I’m trusting the authors and Geithner. As professors at institutions that believe in the free market, I’m guessing they are seeing things most of us don’t.
There will be people pointing fingers. It might have been different if Greenspan had allowed treasuries to give a higher return. It might have been better if CDO swaps had been regulated. But they weren’t and a lot of people made a killing.
#12 Why am I not surprised at your assertion that 99.999% are “underqualified to judge the current depth of the problem”?
No offense meant, but Geithner couldn’t understand the depth of his own tax forms! Now we’re supposed to trust him to understand and solve this systemic problem? With a plan that is sketchy on details?
Not only that, #13, but he utterly botched his debut to the markets and deepened the crisis of confidence. He is not the indispensable man Barry made him out to be, knowledgeable as he may be.
There were plenty of folks who saw this coming. However both Republicans and Democrats, particularly Barney Frank, Pelosi and the Clintons were bought by Freddie, Fannie, and Goldman Sachs. Obama also had gigantic contributions from Freddie and Fannie.
It was thus not profitable as individual politicians for politicians to solve this systemic problem, because if they did, their ability to collect from banking lobbyists would suffer. Now we are supposed to trust them anyway.
We are printing enough money to buy all the morgages in America outright. Instead of doing this, and cancelling the debts of all Americans (which this size of money could do) we are failing to do that in order to save the fortunes of the banking elite to whom our politicians (of both parties) are beholden, and to which strata of society, they hope to one day join.
Sherlock Holmes once said something on the order of “In a fire, a woman will grab whatever her most valued possession might be. A married woman will grab her baby and rush to safety. An unmarried woman will grab her jewelry box”. Our financial house is on fire, and it is clear who or what is most valuble to our politicians. They grabbed the bankers and rushed to safety with their Wall Street darlings in their arms, leaving the rest of America to burn.
[i]We are printing enough money to buy all the morgages in America outright. Instead of doing this, and cancelling the debts of all Americans (which this size of money could do) we are failing to do that in order to save the fortunes of the banking elite to whom our politicians (of both parties) are beholden, and to which strata of society, they hope to one day join.[/i]
This is so true. Every word. It’s beyond plutocracy. Kleptocracy.
If we nationalize the banks, we will have Kleptocracy on a much larger scale than it exists now. We will see Fannie Mae and Freddie Mac writ large.
Government ownership of business is generally a bad thing. When “everybody” owns a piece of something, then nobody really owns it and nobody has any stake in the long term health of the enterprise.
While capitalism is a bad economic system, it is less bad that all the others. Does government have a place in it? Yes! But ownership (or sponsorship) of financial institutions is not it!
YBIC,
Phil Snyder
Phil, I agree with you in theory. In practice, Sweden’s approach was needed in the short-term and went back to normal after the government cleaned up the mess.
If we are going Socialist…let’s go all the way. No half measures. The bankers, the politicians, the “intelligentsia”…if we are going to do this, we should follow the example of history! Those are the folks that brought us to this dance. Let’s play the music louder.
The 10th Amendment beckons.
This is the second Depression for me, as I lived through the collapse of the Japanese economy in the 1990s in what is known as the “Lost Decade.” It also took the Hawaii economy down, which at that time was tied to Japan, not the United States. It took 10 years to somewhat work its way out of that one. My conclusion from that is there is little the government can actually do other than get people to pretend the financial system isn’t broken.
Here in Hawaii we had the “Thumbs Up, Hawaii!” campaign, trying to convince us the economic situation was all in our minds. Now, we have Congress with the “Stimulus Bill,” pretending to throw money to “fix” the situation, when it is simply the largest pork bill this country has ever seen. This was also how the local and State governments tried to fix the situation in Hawaii, by wasting millions and millions of dollars on what are cynically referred to here as “Monuments to Socialism,” all sorts of unneeded capital projects that would at least keep union workers employed and would constitute political payoffs to Democratic Party supporters. Classics include community sign projects (a monstrosity of a large rock or concrete construction with sign telling the community’s name) for which taxpayers were charged millions of dollars per sign; in one case the sign had to be torn down and rebuilt because it spelled the community’s name wrong, and in another, the project was built backwards so that it didn’t face the traffic entereing the community and so no one could see the sign. Other classics were unneeded road “improvements” and “beautification” projects. In most cases, they put in median strips and planted trees in the middle, but they forgot to provide any irrigation systems so the trees eventually died. In one infamous incident, the contractor simply went down the middle of one lane of traffic, dug holes in the middle of the lane and started planting trees in the holes and poured concrete around the holes (that project cost more than a million dollars).
In return for that, millions of illegal political contributions were kicked back to the politicians by the contractors of these make-work projects so that they and their supporters could keep the structure going. Political corruption was rampant.
The result? Since the economy of the Mainland was booming the the Nineties while we were in a Depression, there was heavy out-migration from Hawaii to other States, especially those who were better educated and could look for job opportunities elsewhere. Census statistics indicate Honolulu lost
Sorry, I don’t know why my comments suddenly printed, and then only part. Continuing:
Census statistics indicate Honolulu lost about 14% of its population due to out-migration to the Mainland U.S., which was then undergoing an economic boom in the Nineties. Most of those leaving were those with education and better job skills, and over time the character of particularly Honolulu has changed substantially.
The difference for us in Hawaii this time around is there is nowhere to run, since both the United States and Asia are in the tank. But with tourism off 40-50%, the effects are going to be dramatic here. One of our airlines has already gone under, our telephone company is in bankruptcy, and both newspapers are on the verge of going under. Most businesses, including mine, have been having regular meetings to plan for how we can stave off bankruptcy and for how long. I don’t think anyone here harbors any illusions that government is going to be able to do anything in time to change the situation.
Here’s a story today about the situation in Japan when deflation set in. For point of comparison, our home here in Honolulu lost about 60% of its value during the Lost Decade.
http://www.marketwatch.com/news/story/The-Spiral-Japans-deflation-sapped/story.aspx?guid={14596DFF-3D19-459D-B57B-3BD65ED6F5E6}
What really saved Hawaii from continuing on the same Japanese path ironically was 9/11. Because of the fear of terrorism, more tourists started to come to Hawaii because it was perceived to be a safe travel destination, and then our economy began to recover.
As a banker who has worked in regulatory compliance (by the Grace of God only briefly), the Federal Government has clearly demonstrated that it cannot even [i]regulate[/i] banking properly. I cannot imagine the disaster if it inserted itself into an ownership/management role. [i]Zut alors!!!!![/i]
It seems to me that this generation is so ignorant of our history that they may be lured into repeating the mistakes of the past.
People may have been lured by communist ideas during the, so called “Great Depression“ when the idea of a Communist Utopia seemed achievable, before communism was actually experienced in Russia and other Communist countries, but after the failure of Communist Russia’s economic 5 year plans and the reality of Godless Communism’s brutal suppression of religion became evident, people had to wake up to the reality that Communism does not work as well as we flawed human beings expect it to.
Our nation has prospered in the past because our leaders and the people of our country have realized the need for divine guidance and I wonder if our country would be better off if our leaders would just turn off the cacophony of Godless human prognosticators and quietly pray for guidance, instead of panicking and jumping out of the frying pan into the fire of Communism.
This is the time when we all should be praying (as ordinary Americans did during the depression) that God will continue to bless our country and that our leaders will follow His divine guidance. God Bless America.
Let’s rob the productive companies that are employing people and give the money to the parasitic failures! It’s the Christian thing to do! We must act NOW! For the sake of the children and little cute puppy dogs!
Oh, boy. Some people are not just stupid. They’re evil.
Nationalization would compound the problem and cause the depression to deepen, but I do wonder is there is a better way to make executives answerable to stockholders because individual stockholders may have more interest in the success of a company than mutual fund managers and brokers do. Today’s stockholders have almost no influence unless they own individual stocks.
There are times when I wonder if today’s executives really know how to run the companies they have inherited from the executives who built them in the first place.
I am not an expert and hope I am mistaken about this but it seems to me that executives are now more interested in making deals and merging with other companies than they are interested in managing the monster companies they have created with their trophy deals. This does not bode well for the stockholder or our economy.
#15 & #16 Bravo!
True words. It is too logical to pay off people’s mortgages. You are right the real goals here are not to revitalize the economy. The goal is to increase the wealth of the Kleptocracy and to seize as much power for the elites as they can all the whiles making the middle and lower classes further dependent on and subject to the Kleptocrats benevolence.
“Today’s stockholders have almost no influence unless they own individual stocks. ”
Another reason that today’s stock market will fall further. (In addition to the obvious demographic reason). What mutual funds have done is disconnect executives from company owners. It used to be that the company owners were a handful of hard nosed men who would keenly review financial sheets and would be quick to fire executives who were simply padding their salaries.
What folks need to do is to forget stocks, and bonds (which they have no control over, and invest their monies in small businesses. Laundromats, construction, farms, whatever. Those are real assets not puffed up paper like “Pets.com”, and you have control over the folks who run the business.
The 401k forced the US to save in mutual funds, rather than in S&Ls;and CDs, and in the equity of their small business. This drove small business out of business, by making it easy for companies that “went public” to take on debt, expand, and undercut those small businesses using easy credit and monies from sale of stock.
More reasons why the 401k will go down in history as the most disasterous financial instrument to hit the US. Not only have they been annihilated in the past year, and not only will they surely fall further; Not only will his Osomeness freeze withdrawals from 401ks (probably by the end of this year) but taxes on those withdrawals are guaranteed to be far higher than the taxes that were deferred as they were built up.
And on top of that the 401k destroyed small businesses, while making everybody feel rich enough to take on more debt.
Please forgive my sloppy (non existant) punctuation above. I was on a rant. *red faced*
28: That is just nonsense. Back in the days when there were few investors, they (and the big bankers) all knew each other either hated each other or couldn’t say no. They weren’t economic calculators; they were human beings, full of sin and self-delusion like the rest of us.
Clueless #28,
I agree with your no-nonsense advise. I think that many people are finding out that mutual funds aren’t as profitable as they expected. It might be wise to purchase a some individual stocks in order to find out what is going on in the companies that you invest in.
Spelling correction: advise should be advice.