Did the world end today?

by on October 13, 2008 at 1:29 pm in Economics | Permalink

Not yet, the economy is staying above water.  Toward the future, here is a very good list of credit market indicators to follow.  A lot of the credit markets reopen tomorrow.  Felix Salmon is optimistic.  But in Iceland shoppers are emptying the shelves because it is hard to import food.  Kashkari says the Treasury will invest only in healthy banks; of course recapitalization makes the most sense for unhealthy banks.  One way to try to figure out what is happening is to work backwards from the lies but that can end up being very misleading.

1 Bob Murphy October 13, 2008 at 1:57 pm

Kashkari says the Treasury will invest only in healthy banks; of course recapitalization makes the most sense for unhealthy banks. One way to try to figure out what is happening is to work backwards from the lies but that can end up being very misleading.

It led me to believe these guys are a bunch of crooks. Is there something I’m missing?

2 odograph October 13, 2008 at 2:04 pm

Back to eating rotten shark? Poor guys.

3 Tyler Cowen October 13, 2008 at 3:01 pm

This may just be semantics but obviously a sufficiently health bank doesn’t need recapitalization at all…

4 Greg October 13, 2008 at 3:12 pm

Is there a sizable pool of banks healthy enough to not need recapitalization at this point? My assumption would be no. And for that matter, wouldn’t healthy banks be best able to deal with the extra capital, even if they don’t need it? Sort of like the old complaint about how you can only get a loan if you don’t need it?

Clearly, some kind of more sophisticated segmentation needs to go on. Kill the weakest banks, restructure/recapitalize ones with the potential to be saved, and throw some money at the relatively healthy ones along with some kind of mechanism to ensure that they lend.

5 Mark October 13, 2008 at 3:16 pm

Kashkari clearly doesn’t want to say what he plans to do. If he says the truth (“We will recapitalize struggling banks”) he is making his own job much more difficult.

It is getting rather Orwellian, though. All banks are healthy, but some banks are more healthy than others?

6 Alan Brown October 13, 2008 at 4:19 pm

Perhaps if we just let the market work, we would be in this mess.

Its never too late to start.

7 John B. Chilton October 13, 2008 at 4:33 pm

The trick is to identify banks that are healthy but for the lack of confidence in them. Isn’t that all the semantics is about?

Not that it is easy to determine which are in that category. Is there perchance some inside information regulators might have, or that a bank could reveal to anyone seeking a preferred equity stake. If Buffett has this capacity to identify and reinstall confidence in a bank might not the government?

Mankiw has suggested the government offer to take an equal share in any investment of private investor like Buffett is willing to make.

http://gregmankiw.blogspot.com/2008/10/how-to-recapitalize-financial-system.html

8 livingston October 13, 2008 at 6:04 pm

“This may just be semantics but obviously a sufficiently health bank doesn’t need recapitalization at all…”

May be the semantics is in recapitalization…may be good banks need the capital infusion to absorb the bad banks…why would that not be a good thing to do? May be in the heat of the battle, anybody trying to do anything is called a liar

9 SharkGirl October 13, 2008 at 7:18 pm

I see all of this as a strategic plan for the top bankers and buy out firms to eliminate their competition, and gaining access to taxpayer’s money from all around the world. What better way to make yourself richer than by creating a forced financial crisis around the world, then collecting “bail out” money? It’s kind of like Wal Mart building close to all the K-marts. Eliminate the competition and you make yourself bigger.

How many members of Congress have a financial stake in the bankers and buy out firms? I can tell you at least two (in Georgia) are linked to a major buy out firm. One of our Senators refused my complaint against a Fortune 500 company because they depend on a key defendant in my cases to raise funding for them. That Georgia Senator (Chambliss) voted to approve the bail out money.

10 Tom Grey October 13, 2008 at 7:48 pm

Banks, schmanks — real companies need loans. Let the Regional Federal banks make loans to any and all companies that have been getting loans in the past. At a slightly higher than previously paid rate of interest.
(Buying commercial paper is similar).

There is no way for the gov’t to fairly choose which banks should live and which should die, but if the $12 tril. house value outstanding mortgages have been reduced to $6 tril. in ‘market value’, then somebody has to eat $6 tril in losses.

That somebody will mostly be the banks … or taxpayers.

There are far too many banks, doing too little of real increasing production — and the internet means less intermediation is needed.

11 josh October 14, 2008 at 12:29 am

If you look at the market caps of the top 20 banks (and yes, this picture has taken on many forms in the past year), you’ll notice a cliff around #’s 4/5. While the immediate priority is to provide stability, it seems likely we will need to help smaller regional banks, as they play a crucial role in providing loanable funds to small businesses (as in less than 100 million rev). TARP really doesn’t do much for smaller regional banks that weren’t major players in some of the most toxic assets, such as “subprime loans” (I still love saying those two words) and had somewhat responsible risk management, as the provisions and charge-offs are being driven by a very small portion of their total books. No small business is going to want to bank with a jpm or B of A and neither one of those giants are going to fight for a small business relationship. The problem isn’t really about getting bad assets off the books right now. The problem is funding, and deposits are the cheapest cost of goods sold, which is why increasing the guarantee on deposits may be the best aimed policy thus far, if not quantitatively important for funding costs – give the banks some breathing room, while still allowing them to work through the bad assets they made. I still remember my econ professor saying, “investment spending…fickle”. I’m not particularly looking forward to the challenges ahead either, but an axe isn’t going to solve the problem, although I still love saying the words “subprime loans”. I just hope I don’t ever hear my grandkids say “subpar loans”.

12 Josh Wright October 15, 2008 at 1:38 pm

Recapitalization????…yeah rite…if there isnt any capital being installed into the bank then i dont care what you do to change your capital structure….it still will be unhealthy like grease is to a diet!!….might want to consider closing it down……sorry…

13 CZ Electric May 27, 2010 at 3:48 pm

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