We need a new banking system. A new banking system takes years to
build. We will be in an economic downturn for years and because this
crisis is global it will not be better than Japan in the 1990s. It is
hard to build a new banking system through the current, old, nearly
insolvent banking system. Maybe some smart person has a
plan to build a new banking system through the old system, while
avoiding toxic contamination through the problems of low-solvency
institutions. That smart person remains silent. I have not given up
hope. The Great Depression had bank failures, we have bank zombies.
don’t we have 2 banking systems? local, retail banking and casino banking, which is where the extremely smart and wealthy play notional betting games with house lines of credit?
How about this. Each of the 5 Canadian big banks is assigned (i.e. given) one or more of the most struggling banks worldwide. They’re also given a capital infusion from the G8 and others of a few trillion $$$ in order to absorb all the garbage on the books. Then they’re forced at gunpoint (metaphorically of course) by the govt. of Canada to get global commercial credit flowing again. Canada does end up running all of world finance and Toronto becomes THE global financial center but that seems only fair since we apparently are the only ones who weren’t stupid enough to get into this mess in the first place.
Do we really need a whole new system? How about the current system with a revaluation of risk and less leverage?
George Soros is pretty smart.
In today’s WSJ he has a proposal for fundamentally rebuilding the part of our system that is most broken, the housing mortgage market. His idea is based on the proven model that Denmark has long used.
Here’s a key part of his proposal:
“Finally, the asymmetric nature of American mortgages is replaced by what the Danes call the Principle of Balance. Every mortgage is instantly converted into a security of the same amount and the two remain interchangeable at all times. Homeowners can retire mortgages not only by paying them off, but also by buying an equivalent face amount of bonds at market price. Because the value of homes and the associated mortgage bonds tend to move in the same direction, homeowners should not end up with negative equity in their homes. To state it more clearly, as home prices decline, the amount that a homeowner must spend to retire his mortgage decreases because he can buy the bonds at lower prices.”
Soros believes there’s a relatively straightforward path to get us from here to there.
What do you think?
It exists already:
http://en.wikipedia.org/wiki/Microcredit
Don’t save big fat cats, save the entrepreneurs and the workers! Most of employment and taxes in the world comes from them, if you take out the few bubble years.
People just need to calm down, I’ll take a bad crises every 75 years and a recession once every 12 years. We don’t need a new system, we just need a few more rules added to the old system (mostly in the swap system, more transparency). We could socialize all banks have stagnate growth, but I say let the free market take its course.
We need to stop playing with numbers like borrowing from ourselves and giving us back to ourselves by calling it a “stimulus package. The best long term thing we can do is chug along through this like sensible people. We have to take the good with the bad. I think most American’s understand this, the bad thing is that our politician’s and policy makers don’t believe this
BruceM:
“The church will stand, I think. They’ll need it.”
I always love reading comments that make my gloomy take on the world look like that of Norman Vincent Peale….
Well at least now we now how much the Lehman CDS is worth: 8.625, down from the mid-market 9.75 and far less than the expected 13. The bidder list is interesting too.
“I blame about 95% of it on Bush”: you starry-eyed optimist, you.
I get 5 credit card solicitations in the mail every day; there is money to be lent out there. Isn’t the problem relatively localized within certain functions in the banks? Why don’t we just let the sickest firms declare bankruptcy and sell their corporate credit depts and other non-cancerous parts whole to healthy banks? Put the proceeds into a fund for contingent liabilities, auction the remaining CDS’ and move on. The downward shock in capacity will make lending very profitable for the next two years, and investors will provide funds. We’ve still got 7,000-8,000 healthy banks to go before Armageddon.
The answer is an old story: the devil is in the details.
1. Recapitalization plan
Needs to be carefully structured. Should the government stake be a form of callable super capital that takes precedence even over existing long-term senior debt holders? The balance between helping banks and not helping them too much is the hardest part of the plan.
Relies on an aggressive FDIC shutting down the worst and those that abuse the aid. FDICIA and the S&L crisis experience will probably help the FDIC make good decisions.
2. Anyone who thinks that government recapitalization will unfreeze interbank markets needs to explain why this would work. The problem in interbank markets is that the cashflow banks used to trade in these markets has flowed elsewhere. Unfreezing interbank markets will require redirecting the money that’s gone into Treasury money market funds to financial commercial paper or bank deposits. Ideally this would be done through market incentives, like say, allowing Tbill rates to go negative. Maybe a guarantee on all deposits is a good idea — if people want government paper they can access it via the banking system. (Of course, this too would require the FDIC to be hyper-aggressive.) The thought that government might try to intermediate these flows is downright scary.
One more thought: Policy makers need to remember that in order for a deposit insurance scheme to be effective in drawing funds to/keeping funds in the banking system, policy rates can not fall too low. Large depositors need to get a decent low return, or they may turn to risky (but potentially profitable) alternatives like commodities.
How many banks do you think are insolvent? And what are you basing it on?
We’d be better off in the long run if people withdrew all their money from banks and bought physical silver and gold…honest money would bankrupt the frauds.
I should be clearer. I think that the freezing of interbank markets is a cashflow problem, but it’s a cashflow problem with a peculiar characteristic: The banks have lost their cashflow for an indefinite period into the future. I.e. until financial commercial paper recovers or they get a huge surge in deposits, they have no reason to believe that their cash flow problems will improve. They know that any financing via the Fed is a short-term fix. But they don’t have any reason to believe that their cashflow problem is a short-term problem — unless government finds a way to redirect Joe6pack’s (or more accurately James Corporate Treasurer’s) funds back to the banks.
If there’s no major recession, all this goes away.
Unless all this goes away, we’ll have a major recession.
What kept the USA from Anarchy in 1929?
Tyler,
Surely you don’t expect political processes to pick a good banking system, let alone quickly? I guarantee you the people who know how to design better banking systems aren’t silent, we just aren’t listening to them because picking them out of the noise is nigh-impossible.
The question should be over what process would select the next good banking system(s). I’d bet it would be one that didn’t produce a de-facto monopoly like our political selection mechanism.
“What kept the USA from Anarchy in 1929?”
1. Much more of America was rural and dispersed at the time.
2. The people in urban cities had, um, more civility than many today, the parents of the greatest generation. Without mentioning the elephant in the room, if today’s citizen’s of Watts or Detroit lost their deposits, it would not be pretty.
If you are trying to convince us that the economy did well from 1932-1940 it’s going to take more than that. Are you seriously proposing that FDR shortened the depression and that without him, it would have been deeper and longer?
Although I am not fond of greedy wall street bankers, I can not help but wonder if they are really the problem. They have always been around, but only in that last few years did they rush to invest in mortgages and they even added money take up the slack when in 2005 Fannie and Freddy cut back. It seems odd that that so much investment money flowed into home mortgages which is consumption, and not into productive sectors of the economy. In the rush to find the guilty are we overlooking a more basic problem in the economy, and how much better can we expect a new improved system to work if it operating in an economy lacking in profitable productive investments.
“If you are trying to convince us that the economy did well from 1932-1940 it’s going to take more than that. Are you seriously proposing that FDR shortened the depression and that without him, it would have been deeper and longer?” — Cliff
1) No, Cliff: I was responding to a shallow, poorly informed, and extravagantly silly claim main by Matt.
As for your question, it refers to a much more solid matter . . . and currently a major theoretical debate that has roots in free-market criticisms of FDR’s hit-and-miss policies after 1933 in that period (Simon at Chicago, for instance), and that an important modeling article published by two UCLA economists in 2004 (Harold L. Cole and Lee E. Ohanian) published in 2004. Cole and Ohanian used a neoclassical model that drew on “real business cycle” and trend technological productivity (TFT in growth-models: or also multifactor productivity MFT as it’s often called)and found that FDR’s polices — measured against this simulated path-model — did delay recovery.
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2) Most economic historians, even those who praised their modeling effort, remain skeptical. The following article — which is not gated — is a good, readable summary for you and the rest of the general public who are interested. Among its virtues as a summary of the debate, it treads softly around the statistical modeling in the Cole-Ohanian model.
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3) Though I have a Ph.D. in both economics and political science, I was until my retirement recently at UC Santa Barbara an international relations specialist in political science: foreign policymaking, security matters, war-peace, global political economy, and comparative political/economic systems.
And, from that viewpoint, the biggest weakness of the Cole-Ohanian model is its insular modeling perspective, without reference to the gold-standard, price-deflation related to it (1929-1933), tariff protection, and the wider global depression . . . all changed by FDR, with beneficial effects (along with the banking holiday and recapitalization that followed). Barry Eichengreen at UC Berkeley has been writing authoritatively on these matters for a couple of decades, and he has strongly urged global coordination these days in tackling the current financial crisis — as in the G-7, IMF, Bush, World Bank, and financial ministers meeting this weekend. (And the EU summit meeting this weekend too).
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4) I won’t say anything more about my own views regarding the Cole-Ohanian model . . . which remains impressive from a statistical modeling effort in new-classical (real business-cycle theory) — one of whose two Nobel Prize winners, not Prescott but Finn Kydland, was a colleague at UCSB near my retirement date). It also shows what can go wrong with an approach that seeks a general equilibrium model and excludes important other causal variables in order to account for a very complex situation like the Great Depression in the US. (Well: Cole’s and Ohanian’s effort would also be more useful if it and other economic studies had a comparative perspective as well. In particular, if it and they compared the New Deal “regime change” in politics and economics to the disastrous collapse of fragile democracies and their replacement by fascisms, Nazism, and militarized right-wing dictatorship all over the Continent of Europe outside Communist Russia and strife-torn polarized France, along with the tiny Scandinavian countries, Holland, Belgium, and Switzerland.)
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5) Here is the very useful link:
Contributions to Macroeconomics
Volume 6, Issue 1 2006 Article 13
Real Business Cycle Theory and the Great
Depression: The Abandonment of the
Abstentionist Viewpoint
Michel R. De Vroey_ Luca Pensieroso†
http://www.bepress.com/bejm/contributions/vol6/iss1/art13/
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Michael Gordon, AKA, the buggy professor
He didn’t have to provide evidence. The lack of subject personal experience by the zombie banks is, by itself, sufficient to show that we need a new banking system.
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