Monday, February 23, 2009

Put a bullet in the beast

Paul Krugman's column this morning makes the case for nationalizing some banks. And he says that Alan Greenspan agrees:

Comrade Greenspan wants us to seize the economy's commanding heights.

O.K., not exactly. What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — actually said was, "It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring." I agree.

There are some really, really big banks – such as Citibank and Bank of America – that could, probably would, fail without further intervention:

Third, while banks must be rescued, the U.S. government can't afford, fiscally or politically, to bestow huge gifts on bank shareholders.

Let's be concrete here. There's a reasonable chance — not a certainty — that Citi and BofA, together, will lose hundreds of billions over the next few years. And their capital, the excess of their assets over their liabilities, isn't remotely large enough to cover those potential losses.

zombies ahead Arguably, the only reason they haven't already failed is that the government is acting as a backstop, implicitly guaranteeing their obligations. But they're zombie banks, unable to supply the credit the economy needs.

To end their zombiehood the banks need more capital. But they can't raise more capital from private investors. So the government has to supply the necessary funds.

But here's the thing: the funds needed to bring these banks fully back to life would greatly exceed what they're currently worth. Citi and BofA have a combined market value of less than $30 billion, and even that value is mainly if not entirely based on the hope that stockholders will get a piece of a government handout. And if it's basically putting up all the money, the government should get ownership in return.

Spot absolutely has to say that he told you the same thing. Okay, that was shameless. Sorry.

Spotty, didn’t Krugman talk about bank recapitalization, a step just short of nationalization, even before that?

We can discuss it later, grasshopper; Spot is busy.

The alternatives are let the banks alone to stumble along aggregating losses until they fail, unable to be a source of credit to the economy, increasing the government’s FDIC risk all along the way, OR put a federal bullet in these beasts, giving the existing capital in the bank a haircut, because it isn’t worth anything anyway, really. Then selling the good assets off to new investment. Receivership is just as good a word as nationalization.

You did it again, Spot.


Mixed your metaphors.

You miss Katie, too, don’t you grasshopper?

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