Baseline Scenario | When you cut through the technical details and the marketing distractions, sorting out the US banking fiasco comes down to one, and only one, question. How tough are you willing to be on the people who control the country’s large banks?
One option is to be gentle with them and adopt only ideas that they pre-approve. This route involves complicated schemes to purchase, lend against, or otherwise “wash” toxic assets out of the banks using taxpayer subsidies. This will be
expensive (for the taxpayer), messy politically, and - most likely - will not work, in the sense of restoring the banking system to something close to its normal mode of functioning; check with Hank Paulson for details.
Alternatively, you can be tough and take steps towards really assessing which banks are insolvent when you use market prices to value their assets. These banks can be taken over in a scaled-up FDIC-type procedure (no golden parachutes!), and controlling stakes in fully recapitalized banks can be sold off immediately to new private owners. The new private owners can handle, under proper anti-trust supervision, the break up the banks. This approach will be cheaper for the taxpayer (but nothing is free at this stage), easier to explain to the electorate and their representatives, and it will work - this is in fact the standard prescription because it always works. But it will not make powerful bankers happy.
So which way is the Obama Administration heading? We honestly don’t yet know; the signals are mixed.
Fist tap to rembom for the Simon Johnson interview and baseline scenario.
One option is to be gentle with them and adopt only ideas that they pre-approve. This route involves complicated schemes to purchase, lend against, or otherwise “wash” toxic assets out of the banks using taxpayer subsidies. This will be
expensive (for the taxpayer), messy politically, and - most likely - will not work, in the sense of restoring the banking system to something close to its normal mode of functioning; check with Hank Paulson for details.Alternatively, you can be tough and take steps towards really assessing which banks are insolvent when you use market prices to value their assets. These banks can be taken over in a scaled-up FDIC-type procedure (no golden parachutes!), and controlling stakes in fully recapitalized banks can be sold off immediately to new private owners. The new private owners can handle, under proper anti-trust supervision, the break up the banks. This approach will be cheaper for the taxpayer (but nothing is free at this stage), easier to explain to the electorate and their representatives, and it will work - this is in fact the standard prescription because it always works. But it will not make powerful bankers happy.
So which way is the Obama Administration heading? We honestly don’t yet know; the signals are mixed.
Fist tap to rembom for the Simon Johnson interview and baseline scenario.
