Never have I disagreed so much with bonddad than in the case of his last diary on why TARP was supposedly necessary.
His point is that the banking system is collapsing under losses and need help to survive. The problem is that the first part is true, but not the second. The reality is that the banking system is fucked up beyond help, and the only solution is to nationalize it wholesale in order to put it back on a sound footing.
I wrote in October that wholesale nationalisation of the banking sector was necessary to get lending re-started. Today, the NYT notes, seemingly with surprise and some righteous anger, that banks are not using bailout money to make new lending (which was, remember, the reason why we had to urgently - URGENTLY! - give the banks hundreds of billions of dollars or euros):
A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.
The above is about the US, but the same is happening in the UK, where the government is having to unveil a second bank bailout because - doh! - " the worsening global financial crisis has caused banks to cut lending" (no mention of the fact that the first bailout did not impose lending requirements, of course - that would be governments dictating policy rather than the markets, and we can't have that, even when markets have absolutely failed).
The only result of the ideological blinders that prevent an outright nationalisation - and governments, as owners, setting lending policies - from happening right away is that we'll lose several hundred billion euros more before it eventually happens (part of it as a windfall to bankers, their shareholders and creditors, and part as lost activity in the meantime), as it has to.
Krugman is saying essentially the same:
policy makers -- possibly without realizing it -- are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as "fair value" purchases of toxic assets.
Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word -- nationalization.
Nationalisation is the solution
The current banking system is terminally bankrupt. Banks today will not lend, even to sound businesses, even if you give them the money to do so. So you have to compel them to lend. Banks (or more precisely, their shareholders, management and creditors) should not be saved: they should be repsectively wiped out, fired and made to take their losses. The banking infrastructure (including most employees, which had little or no responsibility in the crisis) can be diverted from its prior uses towards those now determined by government as part of the mopping up exercise of the hole that the very banking system created.
Financiers are part of the problem, not part of the solution, right now. Don't save them. But save the boring, utility bits of banks. Banks will not do that on their own. Government has to force them. Urgently.