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February 10, 2009

Fools Errand

It is painful watching the new administration stupidly struggle with rebooting existing banks by buying their worst assets, the "bad bank" concept. The approach is fundamentally wrong. The government needs to buy/nationalize at least one nationwide bank, such as CitiGroup, which employees call "too big to fail, too shit to buy." A sovereign bank. Pump capital through that bank to revive lending. Let other banks fail as they may, in which case strategic ones are nationalized too, until liquidity once again flows through the financial system. It should be abundantly apparent that the financial health of this country is too important to be left at the mercy of greedy short-sightedness, to just buying dross. Moral hazard is what capitalism is supposed to be about, not handouts to the greedy rich.

Posted by Patent Hawk at February 10, 2009 11:02 AM |

Comments

And fail they will. How would these other banks possibly compete against the federal government, its nationalized bank, and its ever-running printing presses? Once you've nationalized the banking industry, do you plan on having the government exit? Or, from now on, do bureaucratic government planners determine who gets funding and who doesn't? And who gets to create the U.S. Five Year Plans?

I think your plan needs a little more work.

Posted by: CAPat at February 10, 2009 11:41 AM

Hi CAPat,

Thanks for the comment.

You seem to know little about how banking, or government in the U.S. works, or has been working. Your concerns seem ideologically crusty, not pragmatic.

And you had no constructive suggestion. A simpleton can nitpick.

Banks lend money based upon lending standards. The reason this financial crisis arose was because banks lent imprudently, not adhering to their own standards. Washington Mutual was a good, big example.

Who owns a bank has little to do with how it is run. That can be a problem, but it is a basic statement of corporate existence that there is a schism between ownership and management. Ownership provides the capital.

The current problem is the reverse of what brought the banks down. Before they were lending imprudently, now they’re afraid to lend prudently, because they need to maintain a higher level of capital reserves.

The government simply needs to select investments in those too big to fail, or well managed enough and wanting capital. In return for the investment, the government gets a stake it can sell at a later time. This is similar to the Chrysler bailout decades ago, where the government made a good ROI.

What I’m suggesting is the U.S. government taking ownership share by pumping capital into the bank, as required. CitiCorp is already partly a sovereign bank, as a large piece is owned by a Middle Eastern sovereign investment fund. The U.S. has already taken preferred shares in banks in this country, in return for capital infusion. I’m just suggesting a larger scale of the same thing.

Posted by: Patent Hawk at February 10, 2009 1:08 PM

What are you blathering about, Hawk???

In response to CAPat you said:

"What I’m suggesting is the U.S. government taking ownership share by pumping capital into the bank, as required."

No, that's not what you were suggesting. What you were suggesting was:

"The government needs to buy/nationalize at least one nationwide bank, such as CitiGroup, which employees call "too big to fail, too shit to buy."

Acquiring ownership shares in a bank and nationalizing a bank are two hugely different things.

Please provide an example of a successful (or any) nationalization of a company by a democratic government. What you are suggesting is totalitarian bullshit. Have you ever heard of Venezuela? Argentina? Need I add more?

Stick with patents.

Posted by: Babel Boy at February 11, 2009 9:33 AM

Babel,
We are Argentina. We just don't know it yet. What Hawk proposes is logical. But who said homo sapiens are logical? We make noises. That's all. "The fundamentals are strong." "Our way of life is non-negotiable." "Predictable results." "Obvious", "Obvious","Obvious". And other such babel. Your moniker is well chosen. ;-)

Posted by: step back at February 11, 2009 10:38 AM

The large point of this entry was don't get hung up on labels. In this case, nationalization.

Nationalization is defined in the dictionary as: "to invest control or ownership of in the national government."

What do you think happened to Fannie Mae, Freddie Mac, and AIG? Nationalization.

What needs to happen is for the government to put as much money into banks as necessary, taking ownership stake accordingly, rather than just buying the bad debt of the banks. If the government takes a high enough stake... Call it what you want.

Nationalization would be good for taxpayers. And a strong signal that the bank is not going to fail.

The alternative is government handout to the banks, with little or nothing in return for the investment.

Posted by: Patent Hawk at February 11, 2009 12:18 PM