Bad Banks & Unserious Government

First in the list of unserious responses to the current economic mess is yours truly.  I’ve been devoting a lot of online time to President Obama’s honesty regarding earmarks.  It might be important to know that our current President is just another president, and not Elrond Half-Elven; and it might be worthwhile to know what an earmark is and whether we have or should get rid of them.  But none of this matters much compared to the world-wide banking collapse.  That, like an impending trip to the gallows, ought to concentrate the mind.

Second, I put Republicans in Congress who also worry about earmarks and who worry about socialism at a moment when government probably should be taking over banks.  What matters now is returning the major banks to solvency.  That’s how you save the capitalist system, if you’re serious about that.  

Third, I put Democrats in Congress who see the current peril as an excuse to legislate their every desire.  Oh, and I suppose you have to list Republicans in Congress here as well.  Except, maybe, for John McCain.  A Congress that insists that banks lend more when lending too much is what brought them to the brink of collapse, isn’t serious. 

Last, but ascending order, I put President Obama.  He too wants to cram a made for TV package of heroic legislative like national health care, when he should be thinking about one thing: how to keep the world economy from seizing up like an engine with no oil.  Looking to a grand vision of the future when all the warning lights are on doesn’t suggest seriousness.

When it comes to the banking system, I know I am a babe in the woods.  That makes me a typical American, and over-qualified for a Congressional seat.  It might just qualify me to run a major financial corporation.  Fortunately, one of my favorite Public Radio shows, This American Life, has taken out time to educate me.  They have done several shows recently that put the Housing Crisis, the Banking Crisis, etc., into language that a reasonably aware fellow can understand.  Here’s a link to their show on Bad Banks, which you can download.  Here is a transcript.  Listen or read, and you will know about as much as I know. 

Here is the gist of it.  Banks keep a balance sheet.  Imagine a piece of paper with a vertical line down the middle.  On the right side are two figures.  One is the bank’s capital, money that belongs to the bank.  The other is the banks liability, money that other parties have deposited in the bank, and that the bank promises to give back on demand.  On the left side of the ledger are the bank’s assets.  That’s money the bank has loaned to some party, who promises to pay it back.  Of course the bank pays interest on the deposit, and charges a higher interest on loans, which is how it makes money.  But the important thing is that the two sides have to balance.  The bank has to be able to pay back depositors with assets plus capital. 

The current problem is that America’s largest banks can’t balance their books.  Their assets evaporated with the housing crisis, and their capital was woefully insufficient to cover the losses.  There is nothing unusual about this situation for an individual bank.  The solution then is for other institutions to step in and take the bank over, recapitalize it, reevaluate the assets.  When it happens to a whole countries banking system, say Mexico or Russia, other countries step in with capital.  When it happens to a region, say, Southeast Asia, the rest of the world has to step in.  No problem.  The rescuers get chunks of banks for their trouble.  But what happens when it’s the whole world?  Where do we go for rescue capital?  The Martians? 

That’s where we are now.  Every capitol, from D.C., to Brussels, to Tokyo, is in the same fix.  Assets have vanished like good souls after the rapture, and the balance sheets can’t be balanced.  This global problem requires a global solution.  It also requires a concentration of mind.  We have to restore the national and international banking system to solvency.  Just right now, our government doesn’t seem to be serious about this.  Nor do the governments of Europe.  This is what a crisis looks like. 

Comments

[caheidelberger]

I will agree that ideology will not solve the problem. We need to act and act big. If nationalization will fix the banks, then nationalize we should, socialism be darned!

[caheidelberger]

[gasp! comments on SDP? I must be dreaming! ;-) ]

[KB]

Okay, but one man's ideology is another's reasonable perspective. All that money spent on education and the environment in the stimulus bill: that's ideology. Maybe the items are a good idea, and maybe they will benefit us in the long run. But they are both of them money pits in the short run. Contrary to what he says, Obama and the Democrats are in fact using the crisis as an excuse for things they wanted to buy.

Nationalizing the big bad banks temporarily is probably inevitable. It is a good question why Obama is taking so long.

ps. I have long allowed comments on my Keloland blog. Only recently has it become easy to allow them individually at the original site.