Bailouts create disincentives.

We are now in the eighth month of extraordinary efforts to reverse the financial crisis. Tillions of dollars have been spent or guaranteed with the stated goal of getting the banks to lend again. Many acronymic plans like TARP, TALF, PPIP and countless others have been devised to accomplish the goal. Yet, it seems that for all the efforts of the Fed and Treasury, little has been accomplished, other than reward bad behavior in the Financial Markets. The more they direct their efforts only toward the largest institutions, the better the hedge becomes for bondholders everywhere. This has been the achilles heel of all the bailout plans, going back to Paulson/Bernanke and right up until today.

I think Joseph Stiglitz has been out of the country for an extended period or we would have heard more from him about the PPIP. He was recently interviewed by Der Spiegel in which he makes a suggestion that is the antithesis of the governments efforts to date.

What do you suggest?

We have to reorganize our bailout system for the financial sector. For one thing, any bank that actually lends should get money from the government; more money to small and medium-size banks in smaller towns and less to Wall Street institutions. The government must also accept the consequences when banks become insolvent ...

… and let them go bankrupt?

No, they have to be saved, because the consequences to the monetary system would be incalculable. But as a countermeasure, these institutions have to be nationalized, which even Alan Greenspan is now demanding. Then the government can close those business segments that have nothing to do with lending and make sure that the banks no longer organize esoteric stock deals that they themselves do not understand.

You can read the entire interview here.

Wouldn't it be a breath of fresh air to see a common sense approach to the problem? I dare say it would be welcomed with overwhelming popular support, but probably not the bondholders and WS executives.

Subject Meta: 

Forum Categories: 

Attention: Investment class

Are you in or out? Stop carping about how worried you are congress stepping in and changing the rules. Just assume they will and price accordingly. If think it too risky then step aside and let us break up the financial oligarchy and see how you like that.

You must have Javascript enabled to use this form.

I have been resisting calling what this is but no longer.

This is class warfare plain and simple. This is the largest transfer of wealth from one group of people to another.

Middle class people don't need financial conglomerates. What they need is a bank that accepts deposits and makes loans. That is it. They can get that from a local bank or a local credit union. We don't need them.

Statements like this absolutely set me off and are a clear indication why this is class warfare:

Attorney V. Gerard Comizio, senior partner in the banking practice at Paul, Hastings, Janofsky & Walker LLP in Washington, said his firm recently held a conference call with representatives from about 300 companies who were “wildly concerned” about the restrictions on hiring foreign workers.

Fu*k them. We need to break this financial oligarchy now and not after Geithner's plan fails.

You must have Javascript enabled to use this form.

And I'm not even sure

About the "make loans" part- unless interest rates are capped at CPI+1% and total debt payment load is capped at 32% of income, I'm not sure more loans are doing the middle class any good at all.

What we need is also to have an alternative bank for day-to-day electronic transactions: No loans, just a monthly fee and a paperless bank that accepts electronic deposits and withdrawals for standardized cash flow.

Let some other institution play the savings-and-loan gambling games- give me a bank that helps me manage cash flow for a small fee.
-------------------------------------
Moral hazards would not exist in a system designed to eliminate fraud.

You must have Javascript enabled to use this form.

-------------------------------------
Maximum jobs, not maximum profits.

Don't we need a

Don't we need a "compassionate" alternative that allows us to "transfer" overpriced jobs by overqualified U.S. domestic labor...to highly disadvantaged lower priced "emerging" zones, as defined by the IMF...to keep the U.S. competitive? (I am appalled that anyone would even think to complain about this global Equal Opportunity policy. I'm simply outraged that outsourcing has even come into question. Slave labor...good. Unions...Bad!;-)

You must have Javascript enabled to use this form.