Tuesday, April 28, 2009

Sheila Bair's Errors in Yesterday's Speech to the Economic Club of New York

The Chairman (not Chairperson?) of the FDIC, who has unfortunately signed on to the veritable destruction of the FDIC by going along with PPIP, gave a speech yesterday to the Economic Club of New York designed to improve her image and, in the nature of bureaucrats, to further increase her power.

She decried the Too Big to Fail doctrine of bank holding companies.  She asked that the FDIC be given the power to take over all of a company that owned a bank that was a member of the FDIC system, even if that company primarily was not in the depository banking business, such as Citigroup.  Basically, she wants a potentially bigger FDIC so that can be on a par with the giants of Big Finance.

Econblog Review agrees with Ms. Bair that new thinking is needed.  EBR also agrees with FDR and probably with the philosopher/mathematician Nassim Taleb that bank holding companies themselves are the problem.  Bring back the Glass-Steagall law and let a company either be a plain vanilla regulated depository institution, with its depositors accepting low-ish interest rates for the security of a government guarantee, or let it be an investment banking company, or a trading/gambling company etc.

Ms. Bair said:

Everybody should have the freedom to fail in a market economy.  Without that freedom, capitalism doesn't work

EBR would ask Ms. Bair what PPIP is about if not preventing Citigroup and others from failing, using my money and yours.  If she really believed the above statement, she would resign from her position rather than risk far more than FDIC's capital for an unfair bailout of the gamblers in Big Finance.

She also offered a misdiagnosis of the status of the banking industry:

As I see it, we are now in the cleanup phase.  We need to get in, do the repair work, and get out.

This is like saying that it is time to clean up after a hurricane before it has left the area.  

Earth to Sheila Bair:  the economy is still shrinking.  Even after the downturn technically ends, the economy will not suddenly become the 1999 economy.  And we can be almost certain that the commercial real estate sector will be in recession or worse even after the economy returns to positive growth.  Worse, there can be no way except in the future looking backward to be sure that another liquidity crisis will not occur.

Count no chickens before they are hatched; don't consider a crisis over till it truly is over.

It's never over till it's over.

Copyright (C) Long Lake LLC 2009

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