Take Your Pick

by Manshu on February 26, 2009

in Opinion

The Daily KOS lays out the four things that the government is trying to achieve to solve the banking crisis:

a.) lifts Big Shitpile off the balance sheets of the banks, while at the same time leaving them

b.) solvent and

c.) in the hands of private investors, without

d.) constituting a flat-out transfer of wealth from taxpayers to bank shareholders.

The clarity and brevity of these four points drive home the almost impossible mission that the plan wishes to achieve. There is no way that all these things can be done together.

You can take your pick and decide which ones you want and which ones you don’t, but getting all of those together is not possible.

I think there is no way that the tax-payers can avoid a transfer of wealth. At best – they can expect that their wealth is not transferred to bank shareholders. Which means that a lot of the bank stocks should eventually go to zero (which is where they seem to be heading).

In that case tax payer money would be used to fund new banks or old banks with new capital, but the existing shareholders will be wiped out.

The third point about keeping the banks private is a – no point for me. I don’t think anyone is interested in seeing the government run banks and the government won’t take such a step at all. They may take over banks temporarily but even they would want to – Reprivatize them as fast as possible. So I myself am not particularly worried about that.

The first two points about lifting shitloads off the balance sheet and keeping them solvent at the same time will be much easier to implement if “them” is seen as the entire banking sector and not the big banks. If the big banks are insolvent – then let them go under and smaller banks and other financial institutions take over their assets. This way even if “they” are insolvent, the banking sector as a whole will be solvent.

The FDIC insures deposits at 8,384 banks and financial institutions, surely, not all of these are bust, and there must be a lot of them who want to expand and take advantage of the current situation. The smaller players should be able to benefit from the mistakes of the big boys and be given a chance to expand.

One of the criticisms of Securum was that it was too ruthless and it got difficult to compete with it. That means that competitors who did the right things were not able to take advantage of the situation as they would have liked to, because the government interfered with the way the markets behave.

So far, in the current scenario very few bankers have complained about the government intervention, but there is at least one banker – US Bancorp CEO – Mr. Richard K Davis who has done so. So that shows that there must be more bankers who want the government to stay out of it all. Which means they are strong and healthy and hence should be allowed to take over the weaker banks or at least the some of the assets of the weak banks, and reap the benefit of their discipline in the run-away years.

I have taken my pick, its your turn now – Which do you pick?

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