A middle ground in the banking crisis
– Paul Danos is the dean of the Tuck School of Business at Dartmouth College. The views expressed are his own. –
A major question in the government response to the banking crisis is choosing between the “evils” of nationalization of banks that would however provide stability, versus the “benefits” of saving of the private banks that would innovate and compete in a market system.
As the dean of the Tuck School of Business I’m privileged to speak with a wide range of economists, bankers, Wall Street executives and our own students, and what I’m interested in is finding an answer somewhere in the middle ground:
* First decide what major businesses absolutely need in banking services and then set up a ‘facility’ to assure that that those prime banking services will be available. This facility would initially be owned by the government but with an explicit goal of going to full private ownership as soon as feasible.
* Make that facility a separate legal entity from private banks.
* Let the private banks operate these “franchised” facility under close scrutiny.
* Have a process by which the private banks ultimately benefit from the operations of the ‘facility’ by having them acquire an increasing ownership in them.
Redefining the sacred in the banking rescue
– James Saft is a Reuters columnist. The opinions expressed are his own –
Another week, another set of protestations that U.S. banks will remain in private hands, apparently almost regardless of the consequences.
It is clear that nationalization violates a sacred value for U.S. policymakers, or perhaps they believe it to be a sacred value held by voters. As we know from behavioral economics, when people are confronted by a conflict between material advantage and their ideas of the sacred, they tend to opt surprisingly often for the sacred.
Sometimes that is utterly right, but in this case it is really a false opposition. The Federal Deposit Insurance Corporation takes control of failed U.S. banks almost every Friday, and while taking some of the biggest over would pose huge problems, it should be possible to do it, to speed recovery and to hang on to what is essential: a market-driven system of capital allocation and a credible 3- or 4-year glide path to privatization for those assets and institutions that end up in taxpayers’ hands.
Fed Chairman Ben Bernanke added his voice to those maintaining that the crisis would be contained — no, wait, that was 2007′s line — that the banks wouldn’t be nationalized.
“I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary,” Bernanke told the Senate Banking Committee on Tuesday.
“What we can do is make sure they have enough capital to fulfil their function and at the same time we exert adequate control to make sure that they are doing what is necessary to become healthy and viable over the longer term,” he said.
Are we better off with:
a. zombie banks protected/controlled by treasury, fed
b. ‘lehmanized’ banks that are simply let go into chaos
c. the slow ‘winding down’ approach used with AIG
d. have the gov’t take over the banking system as it has the student loan sector (my guess is commentator “anubis” might favor this approach)
e. none of of the above (caution: if you pick this, you MUST offer a suggestion of your own!)
Nationalization by autumn, bank on it
– James Saft is a Reuters columnist. The opinions expressed are his own –
Like it or not the United States will be forced to nationalize large swathes of its banking system by the time the leaves fall from the trees in Washington.
The tragedy is that we will have to wait that long and that the costs will mount.
The plan to rescue the banks, or, er, the people, as enunciated by Treasury Secretary Geithner, is no plan, only an apparent set of contradictory principles: an ideological one not to nationalize and a political one not to subsidize too obviously.
The plan will fail unless the administration comes out in favor of either subsidy or seizure of failing banks. Either the United States will be forced to nationalize when that becomes apparent or perhaps it is waiting until that failure makes nationalization more politically palatable.
In either event, it is a terrible mistake and the cost will only grow, both in direct terms for taxpayers and more broadly for the growing number of people with too little income to pay tax.
Geithner laid out a plan to apply stress tests to large banks and require those that do not pass either to raise capital (from whom exactly, I hear you ask) or to accept an injection of convertible securities from the government on terms that have not been defined. Banks that take government coin will have limits placed on their compensation and other actions.
I think you are wrong. What you miss is that the market in distressed or toxic assets will come to life and the values will start to rise. This happens if and when the number of foreclosures can be reduced and credit becomes available for those who wish to buy property. Once the real estate market hits bottom, distressed asset values rise, balance sheets firm up and the economy improves rapidly. By the end of this year, what we now call toxic or distressed assets may actually become desirable again and banks that own it attractive.
What exactly was so great about banks before this crisis?