On "fixing" the banks:
The Swedish solution, the Soros solution, the upcoming Obama solution, perhaps a different Reid and/or Pelosi solution, perhaps a "why-bother" Republican solution- all may be or will be under discussion by the same inept politicians who whooped through the TARP bill last year - enhanced in the Senate to waste more of your money - after sleepwalking through the same financial crisis that set yours truly to essentially dump all of his stocks in the summer of 2007.
The Swedish solution suffers from a number of problems. For one, the Swedes protected the bond-holders. Our current problems stem from the repeal of Glass-Steagall and the non-banking businesses of the "banks" as well as the banking businesses of the "non-bank banks".
There is no reason why bondholders should receive one penny of taxpayer money (except those who bought recently under Federal guarantee, of course). They can take their lumps like everyone else. At least, unlike the great unwashed who bought and may still own NASDAQ stocks in the bubble, they have been getting paid interest regularly. In addition, Sweden's banks were likely not run by as greedy people as ran ours.
The Soros solution calls for injecting equity, again, into these financial companies. Why- the taxpayer cries- why? Let the bondholders try to salvage their investment. Let current or prior management try to avoid Sarbanes-Oxley and other prosecution for fraudulent financial practices, misleading public statements, and the like by putting their money back into the banks- in real quantity; not the pitiful $1 M that Ken Lewis threw back into the pot at BofA.
All solutions seem to revolve against getting lending going again. But there is too much debt now. America grew via land grants and the like: owndership. Let's get to a culture and an economy based not on debt but on equity. So there is a fundamental flaw in all these plans. A more practical flaw is that the same bankers would still be in charge. And they have repeatedly proven that they don't know what they're doing. Let the functionaries at your local Department of Motor Vehicles give out home loans. They can't do worse than Countrywide or Fannie/Freddie did. And they would charge a lot less.
The G30 proposes better risk management of systemically important financial institutions. That current report is sponsored by RiskMetrics. 'Nuff said.
Here are some practical and simple principles for bank reform:
1. Ban all systemically important, "too big to fail" financial institutions. The giant banks and non-bank banks have proven they are too big, slow, stupid and/or greedy to succeed. Never allow them to get bigness back. Not ever. Put it in the Constitution.
2. Allow interstate banking, but keep the banks small. Let a thousand interstate banks bloom, all bite-sized.
3. Bring back a bill that reconstitutes the principles of Glass-Steagall. Require depository institutions to stick to their knitting. Consider mandating the 3-6-3 rule (borrow at 3%, lend at 6%, and get on the golf course at 3 PM) (that's a joke). In any case, banking can be simple. Keep it that way.
4. Do NOT give blanket, gigantic FDIC coverage such as $250,000 per depositor beyond 2009. Restrict FDIC to the little guy and get rid of all the loopholes such as different titles of accounts being considered different for FDIC purposes. Australia did without governmental bank insurance until this crisis, when they had to keep up with Ireland etc., and their banks functioned tres prudently. Depositors kept an eye on their banks and lost no money.
5. America is over-housed relative to its need for international export competitiveness. Withdraw Federal tax support for homeowners in favor of other things, such as health care, environmental initiatives, high-tech industries, export industries, etc. Let people rich and poor decide if they want a better home, better health care, a better or safer car, piano lessons for the kids, etc. It's the health and wellbeing of people who count, not the number of their bathrooms. This means letting the mortgage industry, Fannie and Freddie, the FHA, etc., shrink or go away.
6. Stop manipulating short-term interest rates to levels that penalize saving. It is borrowing that should be discouraged, not saving. The same Fed that messed up in 1929-32 messed up again and continues to mess up. Hold hearings and determine if the country really needs a Fed, and if so whether its "quasi-independence" really works.
7. Do NOT listen to the RiskMetrics crowd re risk management. Listen instead to Nassim Taleb. We can't even conceive of all the risks out there. Let private entities take whatever risks they want, but structure matters so if they lose, it's their loss, not ours.
8. Follow the rule that banking and finance should be a small part of the economy. They should for the most part function like the gears in a clock: unseen and unheard; or like WD-40, lubricating the moving parts of commerce.
9. Sweeping reform of the personal finance/credit industry are required. The current Congressional bill is a minor start. Consider limiting the amount of credit anyone can have extant absent truly exigent circumstances. Place a surcharge on all credit card solicitations. Do all that can be done to fight the Merchants of Debt.
10. Inculcate knowledge of financial literacy in all public schools, starting at young grades. Children handle money at very young ages. They should learn that a penny saved grows, whereas a penny borrowed puts one in a dependent position. As a penalty for its misdeeds, the financial industry should pay for a variety of consumer education programs.
11. Get toxic financial names with bad connotations out of use. Who needs the name, "Citi" and its various permutations? The world is surviving w/o the Bear, Stearns and Lehman Bros. names. It is doing fine w/o Wachovia. It will do fine w/o Bank of America if it truly is insolvent. What's in a name? These weeds stink. They are not roses.
12. The point of #11 is that nationalization is a ruse. It is propounded by those who are part of/wedded to/joined at the hip with the current institutions. Let the companies die if they are terminal.
Where oh where is Dr. Kevorkian now that we really need him?
Copyright (C) Long Lake LLC 2009
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