Japan in the 90's went through a crisis very similar to ours, a huge asset bubble and then a giant markdown.
I get what the crisis is about - liquidity - but there's more then one way to solve it. If we prop up existing institutions no questions asked, we'll end up like Japan in the 90's, where zombie banks were technically fine but actually not able to loan much money anyways, thus dragging the crisis out into stagnation for a decade.
The current failed plan was to buy the bad assets at their original inflated values, sell them back to the market at a reduced rate, and use the funds from selling them to buy additional bad assets and repeat the process until all the money was totally gone. That is, if you believe the conference call that was held between the government representatives and Wall Street insiders ( mp3 torrent
), instead of what was said publicly.Banks operate on the velocity of money. They take money in, send it out again. Don't think of them as repositories, but instead as intermediaries between those who need to hold cash and those who need to spend cash. The banking system is not set up for stasis.
The proposed plan would've increased the velocity of money. Something does need to be done, but jumping to the most drastic expensive plan doesn't sit right with me. I'm totally up for $500 billion worth of no interest loans, something along those lines.
But not recapitalization of the largest banks via burning down $700 billion. Plenty of smaller banks are doing fine. Those are the ones that should be getting help, to replace the large burdened banks. A new day on Wallstreet, slaughter of the behemoths is what sounds good to me.
If 10 years from now there are no familiar old names on Wallstreet, and a new crop of giants risen from the ashes of this meltdown, I'll be a happy camper.
Again, a very interesting post and comments! Can you do a common-lingo post on what you think might be the repercussions of the 700bn bailout failing?
I'm ok with the revamping of wall street just as long as I can keep my finance job (and all it's perks).
With regard to your last paragraph - that is exactly what is going to happen, one way or another. After all, three of the five big banks in NY are already a part of history and the niche players are picking up the slack.
Most Americans are queasy about the bailout as is, so I agree that if it were structured via the implementation of loans it would be a better deal, zero-interest or not. Providing such a large amount of currency to flush the "illiquid" debt should be reward enough for these jackals. Regular folks have to eat a **** sandwich over this, so even if they decided to charge a modest interest rate loans are a reasonable idea. Where in the world could somebody possibly borrow that kind of money interest free anyway? If anybody can find out I would like them to point the US Government in that direction.
Many people are selling this plan as a bulwark against potential erosion of lending capability on the part of holding banks. What happens when we get put on the hook for this money and the banks lend to themselves but not the people? Paulson et. al. have been criticized for not being able to phrase this bailout in plain English, explaining the scenario and how it may affect life at home. People want to know if they will be able to get a car loan, and small businesses want to know if they can get bridge loans to meet payroll. We are being told that yes, this will loosen the chokehold on the credit market, but I am still skeptical about how that will shake out for regular people.
Interesting article today from a Harvard egghead, advocating for bankruptcy rather than a bailout. :::link:::