January 27, 2009

They got themselves into this mess

The banks looking for handout candy from the bailout money continue to spin their wheels in a number of ways. Here's a novel idea for the bailout proponents. The banks got themselves into this mess, let them climb their way out. I'm not talking about abandoning the rescue package, I'm talking about restructuring it. The United States government required restructuring details from the auto makers for bridge loans but it doesn't seem to be the case for the banks despite the fact that the dollars involved dwarf the auto loans.

The fact is the federal dollars for banking are either a giant gift to the banking industry on the backs of the taxpayers the banks betrayed thanks to the social engineering of the Community Reinvestment Act, OR it's a massive buy-in (or buy-out) to socialize the banking system. If it's the former, pat yourselves on the back America, you've just made a record-breaking charitable contribution to a non-charity sector of the economy. If it's the latter, well, if you are convinced that the government knows better than the bankers how to run the banks, you've made a smart move.

A lot of people might think that they couldn't do any worse than the bankers who've gotten us into this mess in the first place, but think again.

1) The government created the housing bubble by forcing social engineering based rules on what should be a strictly economic based industry. Dangerous, and ill-planned. As I've mentioned the problem is not deregulation. According to Wikipedia (not an ideal source, but a good synopsis in this case);

The banking industry is a highly regulated industry with detailed and focused regulators. All banks with FDIC-insured deposits have the FDIC as a regulator; however, for examinations,[clarification needed] the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency (“OCC”) is the primary federal regulator for national banks; and the Office of Thrift Supervision, or OTS, is the primary federal regulator for thrifts. State
non-member banks are examined by the state agencies as well as the FDIC.
National banks have one primary regulator—the OCC.Each regulatory agency has
their own set of rules and regulations to which banks and thrifts must adhere.

They are highly regulated.

The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions. Although the FFIEC has resulted in a greater degree of regulatory consistency between the agencies, the rules and regulations are constantly changing.

2) The government has proven time and again that the private sector is better at running a business than government. Think UPS vs. FedEx. If you were an investor, trying to plan a nest egg for your future, which of the two would you put your money behind? The government should be in the business of running a government, not running areas of the economy that the private sector is able to engage in with a more productive slant. True the banks have made some mistakes but there are over 8500 banks in America, and roughly 90 in trouble. Of those 90, the number that will actually fail is not 100% . Even if it rises from historical levels, it will not be all 90. Put in perspective, there is a problem larger than historically, but it's not time to panic. There is no need for the frenzied bailout proceedings we are witnessing.

Holistically speaking, the industry has more assets than liabilities. Even if the largest 90 are those in trouble (which is not the case), there is the FDIC, and enough asset to debt ratio to be able to weather the storm. Not with flying colors, but the industry is still net positive in the asset to debt ratio.

So is a rescue package needed? Do the banks need to be nationalized? No. Should they be allowed to fail. Yes, with the proviso that consumers are protected, and that no bank that was forced into bad loans by the CRA rules should be allowed to fail. For those banks the fault lies with the government and so too should the consequences. Do banks need some additional buffer in addition to the FDIC guarantees for customers? Yes - for customers. Other than the provisos mentioned above, let the free market do it's job. If you don't, then as many have pointed out, you are allowing success to be capitalist and failure to be socialist in nature. That's a mixture that is inherently unsustainable, and along with the massive debt that is being run up, it's a recipe for the failure of not just the banks, but of America.

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