Banks: Where’s The Action?

It seems to me that there is a great gap between the reality I perceive and the reality that the administration perceives. Form my vantage point the economy is poised at the edge of a prolonged and hugely damaging recession/depression. It could take years to undo the damage of the last three decades and to correct all the imbalances in the economy. During that time we might see vast numbers of people here and abroad suffer through unemployment, loss of income, loss of savings, and constant fear. The potential social cost of this experience could be very large indeed. We only have to go back to the 1930’s to understand what economic uncertainty can do to undermine a nation’s social fabric. During that decade it was by no means certain that either liberal democracy or capitalism would survive the onslaught of populism. Fascism and Communism both approached their high water marks while the market economies all wallowed in depression.

So why is it that our leaders seem to be incapable of taking bold action to clean up the financial system? After all it is in the credit system that this recession began and continues to linger most strongly.

My argument for nationalizing the banks is a case in point. It’s not as if I am alone. Paul Krugman says it here: Failing the test – Paul Krugman Blog

I pointed out last week that I thought there was a danger that the Treasury Department was rigging the risk stress testing it is carrying out to make sure that the big banks pass and thus remain in private hands. This is hardly sensible policy. The reticence to confront issues squarely and aggressively is the hallmark of failing leadership. There is nothing strong about circumspection when the damage is accruing at a rapid pace. Sometimes a leader has to step up and take the chance that a quick decision will cause a loss of support. Sometimes leadership consists of making a decision that turns out to be an error when hindsight can be applied. But in most cases, such as those of today, boldness itself mitigates the error.

I think nationalization falls into this category.

No one wants the banks to be run long term by the government. At the same time no one wants to linger in the slow death spiral we seem to be tolerating so as not to upset or interfere with the shareholders of our banks. Frankly the time for polite respect for private ownership has long gone. Let’s face it: the shareholders let this mess develop. They were more than willing to accept the high risks embedded in the banks’ balance sheets as long as it produced high returns. Now they have to accept the concomitant losses that high risk usually also produces. Tough. That’s the way of a market.

We have plentiful evidence that a weak response to a credit crisis makes matters much worse. Temporizing only delays having to do the dirty work. We have now arrived close to the day that inaction will tip our recession into a depression.

Obama, Geithner, Summers and the rest of them had better wake up and stop the palliative approach. Bring out the hammer and be done with it.

Now.