Wednesday, March 04, 2009

Dissecting James Baker

I wasn't going to comment on Baker's recent op-ed in the Financial Times, but Boulder Refugee mentioned me by name, so I felt compelled.
Unfortunately, the US may be repeating Japan’s mistake by viewing our current banking crisis as one of liquidity and not solvency. Most proposals advanced thus far assume that, once confidence in financial markets is restored, banks will recover.
Good. He seems to recognizes that there was always plenty of liquidiy.
Evidence – a mountain of toxic assets, housing market declines, a sharp economic recession, rising unemployment and increasing taxpayer exposure through guarantees, loans, and infusion of capital
Ahem, and federal laws and regulations that continue to force banks into insolvency despite having capital, and federal mucking of market forces that prevent people from determining true "fair value" of assets.
We should act decisively. First, we need to understand the scope of the problem. The Treasury department – working with the Federal Reserve – must swiftly analyse the solvency of big US banks. Treasury secretary Timothy Geithner’s proposed “stress tests” may work. Any analyses, however, should include worst-case scenarios. We can hope for the best but should be prepared for the worst.
No. It's far easier to, gee, let things fail on their own.
Next, we should divide the banks into three groups: the healthy, the hopeless and the needy. Leave the healthy alone and quickly close the hopeless.
Why bother? The healthy will succeed on their own. The hopeless will fail on their own. The needy will succeed or fail depending on what private individuals deem is better: if there's a good chance for profit, or if they're just throwing good money after bad.

Stein's law about current accounts also applies to this: if something cannot continue forever, it will stop. Despite Paul Krugman's outright misrepresentation, Stein used it to say that active steps need not be taken to stop something that will on its own.
The needy should be reorganised and recapitalised, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds. It is time for triage.
Private investment only. Leave government out of it. Stop the immoral raping of taxpayers to save institutions they don't care about.
To prevent a bank run, all depositors of recapitalised banks should be fully guaranteed, even if their deposit exceeds the Federal Deposit Insurance Corporation maximum of $250,000 (€197,000, £175,000).
Actually, a bank run should be allowed to happen. If a bank has been so imprudent, it should be allowed to fail.
But bank boards of directors and senior management should be replaced and, unfortunately, shareholders will lose their investment. Optimally, bondholders would be wiped out, too. But the risk of a crash in the bond market means that bondholders may receive only a haircut. All of this is harsh, but required if we are ultimately to return market discipline to our financial sector.
Again, let them fail on their own. Failure will ensure that bad managers are fired.
This is not a call for nationalisation but rather for a temporary injection of public funds to clean up problem banks and return them to private ownership as soon as possible.
Yes, yes, and similar things "This is not what you think this is" were said about the Anschluss.

If it were the Bush 43 administration, I'd figure they'd be incompetent at worst. But the agenda of Obama's administration is nationalization, and driving our entire financial industry into the ground will soften up enough Americans into accepting a federal takeover.

As president Ronald Reagan’s secretary of the Treasury, I abhor the idea of government ownership – either partial or full – even if only temporary. Unfortunately, we may have no choice. But we must be very careful. The government should hold equity no longer than necessary to restructure the banks, resume normal lending and recoup at least a portion of taxpayer investment.
"There are no necessary evils in government. Its evils exist only in its abuses."
After replacing bank management with new private managers, the government should have no say in banks’ day-to-day operations.
Say this in your best Captain Kirk voice: "Riiiiight."

Riiiiight. Obama and his Cabinet won't try to inject "social justice" agendas into bank decisions, I'm sure.
The FDIC can assist. Just this year, it has placed more than a dozen American banks – admittedly all small – into receivership. We might also consider setting up something akin to the Resolution Trust Corporation, created in 1989 to liquidate the assets of failed savings and loans. The RTC eventually disposed of almost $400bn in assets of more than 700 insolvent thrifts.
Only a bureaucrat could propose even more bureaucracy. Liquidating a failed business needs no more than a regular bankruptcy court.
To avoid bank runs and contain market disruption, the Treasury should announce its decisions at one time.
That's just the problem: every time Obama or one of his minions opens a mouth, the stock markets tank because consumers lose even more confidence.
Washington will also need to co-ordinate its actions with other major capitals, especially in western Europe and east Asia. At best, this will encourage other countries to take similar steps with their own banking systems. At a minimum, other governments can prepare for the financial turmoil associated with the announcement.
Uh, has Baker been paying attention to the news? Europe can't even get itself together on the bailout.
This approach is not pretty or easy. It will cost a lot of money, with the lion’s share coming from US taxpayers, at least in the short to medium term. But the alternative – a piecemeal pumping of more public money into insolvent banks in the vague hope that things will improve down the road – could truly be historic folly.
Heads, the U.S. taxpayer get sodomized. Tails, the U.S. taxpayer has to perform fellatio. Yeah. Either way, the U.S. taxpayer gets screwed.
Eventually our banks and economy will start to recover. When they do, we would be wise to avoid another Japanese mistake – raising taxes. To counter mounting debt created by government stimulus packages, Japan increased taxes in 1997. Consumption dropped and the country’s economy collapsed.
This much is true at any part in any economic cycle. Raising taxes has historically not produced as much revenue as cutting them.
Our ad hoc approach to the banking crisis has helped financial institutions conceal losses, favoured shareholders over taxpayers, and protected senior bank managers from the consequences of their mistakes. Worst of all, it has crippled our credit system just at a time when the US and the world need to see it healthy.
What did you expect from government action taken to "fix" a crisis that it caused through its short-sightedness and ineptitude?

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