Put the Banks Out of Our Misery

Suddenly, everyone wants to nationalize the banks. Why, in the United States of private property, would the federal government even in this crisis want to seize, good heavens - socialize, the banks. Let us note that President Obama and Secretary of the Treasury Geithner are not yet on board. So why is everyone else, even Senator Lindsey Graham (R-SC), so ready to act?

Because the situation is dire and the solution is clear: the channels of finance or clogged with toxic assets and the FDIC is in the business of selling toxic assets and nationalizing failed banks.

All our major banks are bankrupt and the banking system itself is frozen because the banks do not have any money to lend. That is because they have on their books a vast store of subprime and other securitized toxic assets that no one knows the market value of. The system doesn’t begin to move till we get rid of that burden of bad debt.

Remember way back a couple of months ago when Secretary of the Treasury Hank Paulson threw the then unprecedented sum of $350 billion at the banks. It was supposed to recapitalize the banks by buying up those troubled or toxic asse ts. That money disappeared without a ripple.

The situation now is appreciably worse and trillions could disappear in the same manner if the government tried to just buy or guarantee those assets.

The money machine that is our banking system is an amazingly efficient operation. Banks act as intermediaries between savers and investors. Banks accept your savings or they borrow money short-term at low interest rates and then lend that money long-term at a higher interest rate. The banks make money on the spread between interest rates and people, usually, get the money they need.. The money machine is that simple.

That machine can get into trouble, first, if everyone wants their short-term money at the same time: see Jimmy Stewart in “It’s a Wonderful Life.” The New Deal made this problem obsolete with The Federal Deposit Insurance Corporation (FDIC). Your funds are now insured by the federal government.

Next, banks can also get themselves into trouble when they get greedy with this marvelous money machine. They have to make prudent loans to be able to pay back their depositors and the people who lend them money. When the bankers make a mistake, the FDIC doesn’t pay out money, it takes away their bank.

The particular, greedy mistake banks made this time around was to lend huge amounts long on subprime and other poor credit risks. When these loans went bad in the trillions, it wiped out the banks reserves and even their entire net worth. Those troubled or toxic assets are still on the books and no one knows the value because there is no market for them. The banks are continuing to list them at their original price and pretending their banks are still solvent.

Those high risks paid high interest rates and correspondingly high profits for which bankers were paid high bonuses. They have continued to take the bonuses even as the value of the assets plummeted and the firms they worked for went broke. They deserve to be lose their banks.

Even should the federal government give the banks trillions of dollars, the banks could not afford to lend that money. They would have to hoard those dollars to shore up their capital base hoping to avoid bankruptcy.

The federal government actually has in place already the means to take care of the problem. We just have to let the FDIC do what the FDIC does. It seizes banks that it finds insolvent, gets rid of the failed managers and their enabling boards, sells off the toxic assets for what they will bring, starts the lending machine going again and then the bank is resold to the private sector.

The FDIC calls it a “purchase and assumption agreement” but a forced federal purchase by any other name is still nationalization. Nationalization is what the federal regulators do to insolvent banks. So, let’s not be spooked by the word and just get on with it.

If seizure and sale is good enough for CenterState Bank, Magnet Bank and Suburban Federal Savings Bank, all in the past month, then it should be good enough for Citibank and Bank of America next month.

This situation is not unique. The semi-socialist Swedes were in our situation and they nationalized their banks, sold off the toxic assets, turned a profit for the people and then re-privatized the banks. The Japanese, on the other hand, tried through the 1990s what Secretary Timothy Geithner is trying to do now, that is, act as though the banks were not broke and can muddle through. Japan stagnated for a decade.

Also to the point, the American regulators nationalized the bankrupt savings-and-loans in the 1980s, sold off the toxic assets and got it right.

What’s wrong with doing that again, admittedly on a larger scale? Get with it Secretary Geithner and Mr. President, every one else, including now even Alan Greenspan, is ready to do what has to be done.