Bank bailouts are wealth distribution. About 30% of the American public own some form of financial stock. The majority of ideas being floated right now, involve the shareholders being made whole. So we're saying redistribute everyone's "future" to these shareholder's "now". Also, if we don't make shareholders whole, they'll cry and hold their breath til they turn blue.
This The Nation article runs through the options available to Obama's administration, including an interesting one floated by, among others, George Soros.
Essentially the best idea yet, in my opinion, is to instead of buying all this junk at face value, and hoping it might be worth something, is to take out all of the good assets, leave the banks with the bad, and let the markets do their job: if the shareholders want their money, the greedy bankers have to do a good job valuing and selling the junk. The other huge advantage, is that the bankers don't get to mess up the good investments because they think bank armageddon is coming.
- Synopsis of the "Good" Bank Idea
(Photo credit: Copyright, World Economic Forum Photo by E.T. Studhalter)
There is roughly a 2 trillion dollar "hole" in bank balance sheets, but isn't actually a hole since those sub-prime tainted CDO's aren't completely bad, and not every loan will fail. There are 5 essential concepts in dealing with the credit crisis within the banks
1) Do nothing and let the markets survive
The best idea for Libertarians, Anarchists and fans of the "Left Behind" Series. Essentially, tax payers give them nothing, and do nothing: we let the banks survive or fail on their own. Some of the best economic minds of our time have seriously noted that this will cause a domino-like effect in the world financial system.
Go watch Mad Max 2:The Road Warrior, on blu-ray (and you'll thank me me for the improved transfer,) and pray to whatever divine being you wish to thank them Ron Paul isn't president.
It's very scary, but this is a seriously held politically viable view. People like the concept of being against big payments to banks, but just don't get what that would entail.
2) Trickle money to the banks to staunch the bleeding. Banks limp along
This is the default position at the moment. Although politicians don't want to put their name to another big bailout, they also don't want some old massive institution to go under on their watch, so 30 billion here, 50 billion there.
Soon enough, you're talking real money.
Continuing this without other steps will, in all likelihood, ensure a very long depression. Japan had a "lost decade", and the world could have a "lost quarter or half century".
3) The government pays the banks for junk at full original value
Lots of variants of this: TARP II:Non-preferred stock purchase, government-guaranteed junk auction, "Bad Bank" and so on. The common function of all of these is that the government transfers money from all of us to those holding financial's stock.
If we don't do this then shareholders will stamp their feet, cry and hold their breath til they turn blue.
-Citibank shareholder ("tiny" snark and credits)
Wall Street only likes solutions where the ultimate loser is the tax payer. They don't care about how we get there, just as long as they get whole. The big problem with this is that the management of these companies didn't do such a bang up job of managing money in the first place, and that they've already lost much, all or more than we gave them in TARP I.
4) Nationalisation
-"Work so comrade Stalin would thank you"(Credit)
Decades after Reagan's "Evil Empire" speech, and many more after McCarthy's Anticommunist Commisions, conservatives are still going to the same well of fear and loathing of anything "communist".
Nationalisation isn't exactly Communism, Socialism or Marxism. Its a recognition that an important private institution has failed, and that the public good would be served by taking temporary control of that institution.
"TARP I" ultimately was a partial form of nationalisation, although the non-preferred stock purchase did not give us any actual say in running the bank, we do "own" part of it. I think there are many regrets over this now.
Comrade Greenspan suggested nationalisation might be necessary now. Ben Bernanke, whos original idea failed, has warmed to the idea too.
5) Good Bank: let the market sell the junk
Rather than dump the bad assets on the government, we would strip out the good assets--those that can be easily priced. If the value of claims by depositors and other claims that we decide need to be protected is less than the value of the assets, then the government would write a check to the Old Bank (we could call it the Bad Bank). If the reverse is true, then the government would have a senior claim on the Old Bank. In normal times, it would be easy to recapitalize the Good Bank privately. These are not normal times, so the government might have to run the bank for a while.
Meanwhile, the Old Bank would be left with the task of disposing of its toxic assets as best it can. Because the Old Bank's capital is inadequate, it couldn't take deposits, unless it found enough capital privately to recapitalize itself. How much shareholders and bondholders got would depend on how well management did in disposing of these assets--and how well they did in ensuring that management didn't overpay itself.
The Good Bank proposal has the advantage of avoiding the N-word: nationalization. Some believe a more polite term, "conservatorship" as it was called in the case of Fannie Mae, may be more palatable. It should be clear, though, that whatever it is called, the Good Bank proposal entails little more than playing by longstanding rules, a variant of standard practices to deal with firms whose liabilities exceed their assets.
-The Nation - "A Bank Bailout that works" - Good Bank
The concept for this is that we do NOT bail out the bankers. We let the investors and management ( but crucially, not the depositors) sink or swim. The concept is, that we take away the assets where there is a market for those assets, essentially the "good assets." This both protects those assets, and separates value for depositors separately. We then spin off the "bad bank" letting the management get the best possible deal for these "bad assets"- assets where there is no current market, and where their value is unknown.
This is a lot like throwing the bankers and investors in a pit, and throwing a knife in. They will fight for the best deal. Shareholders may dump ineffective management. They don't worry about the good assets they used to have. Their only concern is finding a market for, and disposing of the junk they bought, getting the very best deal they can.
Yes, there will be losers, but theoretically the least loss possible and no effective damage to the innocent tax payer. The term for this in environmental economics is "the polluter pays".