Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.
Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.
The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.
The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.
My heavens.
They just won’t stop.
Their first 800 billion dollars having failed in their purpose, their answer is to “do more of the same.”
There’s a reason — a good and appropriate reason — why credit is frozen in *some* instances. Because it should be. The ones who aren’t extending credit are right in doing so — because the cost of lending is higher than it is worth. The “cost” has to do with the possibility of getting shafted — and the possibility right now for some is quite quite high.
So the “credit market” [sic] is “frozen.”
Of course — having inquired carefully of bankers and loan people over the past several weeks, we all know that the “credit market” [sic] is not “frozen” — except to some.
I reluctantly resigned myself to the bail-out only because Steve Forbes said he thought it needed to be done. I continue to be horrified by the details.
Once – if — we get out of this mess, we must get the government permanently out of the social engineering business, with the sole possible exception of tax deductions to INDIVIDUALS for desirable behavior, as in buying health insurance. And that’s only if the government will refrain from telling people what kind of insurance they must buy.
No, no no. This is a terrible idea on so many levels it would take all day to list them. Bad for the tax payers. Bad for the banks. Bad for the markets. Bad for good governance. Warning! Warning! Danger Will Robinson!
A criticism of the economic depression of the 30’s was that no one acted quickly enough to mitigate the crisis – essentially a failure of leadership and foresight. While one can understand the desire on the part of today’s leaders for immediate action, one hopes that there is some good foresight attached to the process. Personally, I’m not so sure.
And youll never get “government permanently out of the social engineering business”, because that’s how the parties buy votes. And while I think that the Democrats are the worst offenders, the Republicans do it to. And for that matter all of us get largess and we are adicted to it.
BlueOntario:
In retrospect the Crash of 1929 was extended into a 10 year depression [b]because[/b] of actions taken to mitigate the crisis, especially the mass socialization of the government by the Roosevelt administration.
I’m not fan of FDR, but whatever the cause or where it was heading, the depression was already damaging enough by ’32 to get him into office.
We talk rings around economic theory. Maybe we should be discussing Maslow and Skinner, instead.
Many economic historians think that the crash of ’29 morphed into a Great Depression in great part because the government (this was Hoover) raised taxes drastically and imposed protective tariffs. I don’t recall reading that either party strongly objected to these actions, both of which were exactly the wrong things to do.
Socialist-style government programs of the New Deal didn’t help recovery and probably prolonged the agony.
BlueOntario
It seems that our problem is determining what constitutes bad behavior. The market is punishing all of us for some behavior , as markets will do. What and how can we learn from it? We obviously learned the wrong lessons from FDR’s depression.
“Many economic historians think that the crash of ‘29 morphed into a Great Depression in great part because the government (this was Hoover) raised taxes drastically and imposed protective tariffs. I don’t recall reading that either party strongly objected to these actions, both of which were exactly the wrong things to do”
Katherine [#8] The Smoot-Hawley Tariff Act of 1930 (which is also the tax increase you mention) unleashed a global trend toward protectionism. Although you don’t recall either party objecting, Smoot-Hawley passed on a largely party-line vote. House Republicans supported it 230-27, while House Democrats opposed it 150-15.
In their Monetary History of the United States (1963), Milton Friedman and Anna Schwartz made a persuasive case that the Federal Reserve bore the greatest blame for turning a downturn into a disaster. The Fed tightened monetary policy even as the U.S. economy slipped deeper into recession—ultimately culminating in the collapse of the banking system in early 1933.
Note that the biggest piece of “government social engineering” in housing markets is the tax deduction for mortgage interest.
#10, and #11, yes, I know the tax deduction is government social engineering, and I don’t necessarily support it. At least, as I said, it is under the control of individuals and not required by government agencies. Since so many people take it, all political you-know-what would break out at the attempt to remove it. Although there wasn’t much uproar about the removal of tax deductions for health insurance and medical bills (now you can only deduct massive costs), so maybe it wouldn’t be such a big deal. Right …
I bow to your historical knowledge on the votes on Smoot-Hawley. Really bad idea. Can you persuade Obama, et al., to push for a vote on the Colombia trade deal, which their party has bottled up?
I believe it is more of a case that we forgot that nothing is free and the machine we call the economy had some sort of magical perpetual motion. Like the gambler who thinks he knows what the next card or roll of the dice will be, many thought they knew the trick of easy wealth. In that I agree that we have problems determining bad behavior. There is great irony here (as in all bubbles) that so many people were drawn into it seeking ease and security and found neither. I don’t know, though, who I consider greedier, the people who sank all their money in the bubble expecting something for nothing or the corporate executives who passed out the roadmaps of destruction and left with everything while the getting was good.
Personally, I would be thrilled to see those with great wealth (especially those who profited from it) fix the credit and banking problems themselves, and the people who bought overpriced homes live with what they have. But I don’t expect anyone to do anything other than protect their own wealth, nor can you get blood from a rock.
Unfortunately, as the system comes apart we will all feel the blows, some with more padding than others. I have no doubt that the market will eventually correct itself if left alone. The questions in my mind are: Is it worth the wait? Is the fix worse than the pain? Are the churches willing or prepared to take care of those caught in the collapse? Am I? And one must to ask, where is Christ, who said “For where your treasure is, there will your heart be also,” in all of that?
The market would surely correct itself eventually. Nobody doubts that. if we want years of inflation, the increase of mass poverty and are waiting to sit around until people get tired of hoarding, then yes, lets wait.
Let’s talk about social engineering: government funded schools; government funding of technology and science (usually through the military); roads; trains. These are all “engineered” and change society.
There is a legitimate complaint against the government planning the service economy and trade. It doesn’t work. Planning in places where the market is clumsy (say, natural monopolies, health care, and those sorts of industries that are necessary but don’t create enough of a profit), benefits a commercial society. Which is why Ford and other companies like Canada. They don’t need to pay for health insurance.
But what is interesting to me is that those who loved the free market the most, are loving socialism now.