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Manage my account | The Economist
I like this guy – commenting multiply on the Economist’s leader (beoaning the stimulus inadequacies and Geithner’s vaguesness – Feb 12th 2009)
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(e.g., the Saudi’s, who were actually infusing capital into Citi when their price was $30 per share, now under $4).
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Again, I am only talking about nationalizing the bad banks out there….not all banks are walking corpses…Wells Fargo for example could probably survive on its own without further government assistance…although keep in mind that most of these banks have already been partially nationalized as part of TARP in which the government got preferred equity and warrants.
And again, I think you are confusing what I am saying…when I say seize the toxic assets, I just mean the govt should take it off the balance sheet of the banks and own it itself. The only thing the govt seizes is ownership of the bank.
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These banks are already almost worthless and any loss to 401k’s has already been had. Today the equity value of BAC is only $37BB and Citigroup is only $19BB and those are the two largest banks in North America that are on the verge of disaster. Together that is only $56BB…far less than the cost of all of the other measures we are discussing, and again, the only reason they have that value is because they expect to receive taxpayer subsidies. Do the math…”a financial tsunami never before seen…” gimme a break…$56BB spread over the investor base is puny. If we assume every American owned an equal share in the two of these banks, that would only be $186 per person, but the truth is that they are largely owned by rich Wall-Streeters so the avg impact on 401ks would be even less.
I’m not talking about nationalizing the ENTIRE banking system, there is only a list of about 10 banks that would need to be nationalized and those are only the large ones with serious insolvency issues. Nationalizing those would help the others and FDIC can handle it from there.
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@ Billy T:
“The shareholders (as reflected in Market Cap) do not agree that their shares are worthless.”Yes, because the shareholders are betting on a bailout. These banks are insolvent, as evidenced by their actions (they aren’t lending), not by their market cap (which will always be priced as a call option on the chance for a government handout to shareholders). From a strict accounting perspective, these firms are worthless and if they marked everything to market their equity value would be negative.
As Sweden did in 1992, they forced banks to write down all their bad assets, which then indicated that they were worthless, and then the government injected equity in exchange for virtually 100% ownership. You are having a problem with circular reasoning: you think nationalization would be a violation of property rights because the shareholder won’t sell for zero, but the shareholders won’t sell for zero because they think they can get money from the taxpayers for free.
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You guys who want the govt to guarantee mortgages are insane. You might as well move to Zimbabwe and see what inflation looks like. The mortgages are not the problem, as much as people like to say they are. Asset prices are always subject to fluctuation and that is just part of the way markets work. The problem is the capitalization of banks, which are unable to ABSORB the revaluation of the mortgages. If they had less leverage then there would be no issue with fact that mortgages are performing poorly and lending would continue and the market would be just fine and capital would be redirected to other sectors of the economy.
Changes in asset valuations can never cause depressions, but excess leverage and insolvency of the banking system does.
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There is nothing wrong with nationalizing a bank that is insolvent…the FDIC does it all the time. It’s not a violation of property rights any more than a bankruptcy is a violation of property rights, because nationalizing the banks is nothing more than a government-sponsored bankruptcy.
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The Obvious Recovery Plan (Which Won’t Even Be Uttered By Our Captured Government) (TORP-WEBUBOCG):
1) Nationalize the largest banks and wipe out all existing shareholders
2) Seize the bad assets and put them into a separate govt holding fund
3) Print $500BB of currency to put cash on their balance sheets and pay down their debts to achieve 8:1 leverage ratio.
4) Create new board of directors with at least one director from the Fed/SEC
5) Immediately IPO the now healthy bank on the open market, allowing the government to recover most of its capital injection/money printing
6) The IPO proceeds should be eliminated from the money supply to preserve Fed’s control over monetary policy and to avert massive inflation
7) The Govt then just runs off the bad assets, likely retiring the investment proceeds recovered from the money supply in order to avoid inflation.
Even though this looks like a lot of cash, it would mostly be free to taxpayer as long as our monetary policy can still avoid inflation. Since the we would just print the money and then retire it after the IPO, we really wouldn’t be printing it over the longer term…the govt would just be acting as a broker between the private markets, who can’t coordinate the massive recapitalization of these banks that would be required, and the banks who are stuck in a downward spiral until they do. Effectively the only money that would be printed would be limited to the level of insolvency of the banks at the time of nationalization, but this could be easily mopped up by monetary policy going forward.
Of course, TORP-WEBUBOCG will never be passed because it is too damn obvious and our government is captured by the banking system that it is supposed to regulate, which doesn’t want to see its equity wiped out entirely. I say too bad, this is capitalism.
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Posted from Diigo. The rest of blogread group favorite links are here.
I think the banking system issue is ultimately more important and more fundamental.
Yes, this is correct.
Except beneath that, the real economy is what’s the problem, here. Essentially we’ve had 30 years of sending more and more GDP to the wealthy, which means sending it to wall street (since the wealthy don’t invest it in their mattresses).
In fact, we’ve actually had the Treasury borrow money to pay for tax cuts and for spending (on military, mostly) that fed GDP which, in turn, went to Wall Street.
Because wages have stagnated, the normal economy hasn’t grown with Wall Street.
And because government has been spending its money on tax cuts instead of infrastructure, the only investments we’ve made have been Wall Street’s capital investments.
So, we’ve ended up with the bizarre spectacle of bridges falling down in the Midwest while consumer spending is propped up by insanely cheap credit which is itself made possible because Wall Street is willing to invest in a huge bet on whether or not strapped consumers will be able to make their mortgage payments. And before that, they were investing in dot com “underpants gnomes” business plans. There’s a reason we keep bouncing from tricked-out bubble to tricked-out bubble.
So, yes, we have to deal with the insolvency of so much of Wall Street. And we have to deal with the impact this has had on the real economy.
But we also have to deal with the distributive issue that has led to both those calamities. Regulation is nice, but the problem simply isn’t that we lacked a regulation to prevent Wall Street from making an insane bet. It’s that Wall Street knowingly made an insane bet. Because they had too much money, and there was nothing else to invest in.
You’ve got to get less money trickling up, and more trickling down. You’ve got to get government making sane investment. Then a lot of this stuff will sort itself out.