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February 11, 2009

Understanding The Bailout Problem

-- by Dave Johnson

Here is what the world is going to have to face: the banks are insolvent. Thyey are going to have to be nationalized. This is what we have always done with banks that are insolvent. They just want to avoid it this time because of the word "nationalize."

Here is what is going on. They have these "toxic assets." These assets are currently on their books at the prices they paid for them. If these assets are "marked to market" -- put on the books at their real, current value -- the banks have to show that they are insolvent. They will have to declare bankruptcy. So everything you are hearing about, all the bailouts, FED loans, "open windows" etc are all schemes to try to avoid having the government step in and take over the banks, reorganize them, and put them back out there with new owners. And they all involve giving them billions, even trillions of dollars. This is what the bloggers are referring to as "lighting a big pile of money on fire" or "burying money in a hole." That money just goes away, unless somehow magically the bad assets suddenly become worth something.

WHAT "INSOLVENT" MEANS,

The banks bought the bad assets at high prices. They need to sell them at low prices. But this banker is arguing that they are too financially stressed to absorb the losses that would entail. Conversely, so long as they don't sell the assets, they can pretend they haven't lost any money on them, as they can pretend that they will rebound to a better price once the mania is over. The other way of putting this is that much of the banking sector is already insolvent, it's just not prepared to admit it.

Posted by Dave Johnson at February 11, 2009 8:44 AM


Comments

What's wrong with simply allowing these banks to fail? The FDIC will cover the depositors and the only people to be hurt would be the stock holders and the managers who, I should point out, are the ones who drove their banks into the ground. Someone will buy what assets are left and all will start anew.

We do need a real national bank and we should acquire it by nationalizing the Federal Reserve.

Posted by: WASanford [TypeKey Profile Page] at February 11, 2009 9:41 AM

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