The only way to clean [Financial Crisis] up on a tractable time frame is to take insolvent banks into receivership, explicitly pay off enough outstanding bank obligations to get things in decent shape, break up and reprivatize new healthy institutions, and manage “legacy assets” for the long-run.But basically nobody wants to do this. Obama and congressional liberals want to focus on their core agenda—health care, energy, labor law, education. Republicans don’t want to appropriate money. And bank managers want to continue to take advantage of implicit government guarantees and recapitalize themselves out of operating profits while paying themselves multi-million dollar strategies. Given enough time, that should work. But it could easily take years and give us a prolonged period of sluggish growth.
Friday, April 24, 2009
Monday, April 20, 2009
We've come to this pass in part because the Obama Administration is afraid to ask Congress for the money for a meaningful bank recapitalization. And it may need that money now in part because Mr. Paulson's Treasury insisted on buying preferred stock in all the big banks instead of looking at each case on its merits. That decision last fall squandered TARP money on banks that probably didn't need it and left the Administration short of funds for banks that really do.
The sounder strategy -- and the one we've recommended for two years -- is to address systemic financial problems the old-fashioned way: bank by bank, through the Federal Deposit Insurance Corp. and a resolution agency with the capacity to hold troubled assets and work them off over time. If the stress tests reveal that some of our largest institutions are insolvent or nearly so, it's then time to seize the bank, sell off assets and recapitalize the remainder. (Meanwhile, the healthier institutions would get a vote of confidence and could attract new private capital.)
Bondholders would take a haircut and shareholders may well be wiped out. But converting preferred shares to equity does nothing to help bondholders in the long run anyway. And putting the taxpayer first in line for any losses alongside equity holders offers shareholders little other than an immediate dilution of their ownership stake. Treasury's equity conversion proposal increases the political risks for banks while imposing no discipline on shareholders, bondholders or management at failed or failing institutions.
Tuesday, April 7, 2009
Monday, April 6, 2009
Unfortunately, Defense spending is still going up, because spending on unconventional wars is rising. Obviously some of this is necessary for Afghanistan and Iraq. But how much of that reflects the conflicts America will get into after these wind down? One school of thought suggests that American strategic interests will demand future interventions in failing states to curb instability and terror. This is no doubt what will actually happen.
Alternatively, people could set 'Defense Priorities' with actual resources in mind. We could say that sending soldiers into every last rotten country around the globe doesn't represent an affordable goal. We could say that Europe and South Korea can shoulder their own defense needs on their own, instead of piggy-backing on American tanks. They also depend on American pharma research because they've destroyed their own industry with price controls, and need to be gifted iPods because their firms are too lazy and their consumers too complacent to develop technology.
Anyway, back to the point: Serious draw-downs in military spending will only happen when the last neoconservative is strangled with the entrails of the last humanitarian hawk.