Monday, May 12, 2014

Bank Bailout in the Paper Economy

Timothy Geithner, former Treasury Secretary, has written a book explaining that he had no choice but to bailout the banks at taxpayer expense to prevent the country from falling into deep depression after the crisis of 2008.  Bunk.  There were other alternatives. Bad loans could simply be written off were it not for a rule that says the losses must be a charge against the bank’s assets.  If a rule is a problem, change it.  Another alternative was to nationalize the banks as at least one European country did. 
      You might think that a banker would understand that money created by a loan is just paper.  That paper could be disavowed, and the banks start over.  Likewise for the home owner—the mortgage terms could be rewritten to reflect the new lower value of the property and with new current interest rates. 
      Instead of this sensible policy, we persuaded somewhat more sound banks to buy the insolvent banks creating still larger banks too big to fail.  And, we enabled the management of these banks to pay themselves absurd salaries helping contribute to the increasing inequality we see today.  The home owners that could afford to barely continue paying to avoid default would be spared the agony.
      I described the above to a member of the Board of Governors of the Federal Reserve some years ago.  He said the idea was sound, but they did not have the legal authority to do it.  Was he making any attempt to change the law?  NO.  To do so would be radical and troublesome.  Geithner, Summers, and Paulson were all bankers who do not understand or admit to the essentials of banking.  They were and are incapable of thinking outside the box.  I hope someday that their narrow thinking will be placed alongside the tragedy of the Easter Islanders who cut down all of the trees on their island to build customary bonfires to their gods—only to find that erosion destroyed the island and their pathetic culture. 
     Note-- If this blog does not create some comments, I will be depressed.


kin hang, chris Cheung said...

This may constitute a puzzle as shared in your comment. How may we look into it by understanding how the different proposals produce costs to different parties – the society as a whole and some influential groups? If affecting quite adversely some groups or interests, a proposal may not be easily supported even though it is considered as socially desirable in principle…

Allan Schmid said...

Thanks for your thoughtful comment.