Join        Login             Stock Quote

Fixing a Disintegrated Financial System Requires Political Consensus and Transparency

 February 21, 2009 10:24 PM

According to George Soros, "We witnessed the collapse of the financial system." "The bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system. (The financial system was then) "…placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom." According to US President Obama "The credit crisis is real, and it's not over,"

The debate about nationalizing major US banks has already hit a fevered pitch, and if the first quarter is going to bring another series of multi-billion losses, institutions including Citigroup (C )and Bank of America (BAC) may simply not have the balance sheet resources to remain independent. Having the government seize one or two major banks is increasingly seen as the ultimate key to their survival.

The "snake in the box" however is the concern is that, if the public loses confidence in the rest of the independent banks, brokers, and money managers in the country, (nationalization) could trigger a series of bank runs not seen since the Great Depression. While there may not be a great deal of logic to the prospect of heightened fear about the future of banks if the government ends up owning a few of them, the psychological effects on consumers could be devastating.

Treasury Secretary Timothy Geither has proposed bank balance sheet "stress tests" in his financial stability plan, which will naturally lead to nationalization if these tests reveal that a bank is insolvent. Once the government faces the truth that major banks are effectively insolvent, there really isn't much left to do but nationalize, apparently aka the Nordic model (as examined by two recent papers on the Nordic bank rescues by the Federal Reserve Bank of Saint Lewis and the Federal Reserve Bank of Cleveland)—i.e., a temporary takeover, cleanup and then resale of these banks. But the longer nationalization is delayed, the longer the solvency of the entire banking system will be in question. Thus, more good banks will get dragged down into the mud with the bad.

The worry of course is that the Obama Administration is running out of time and options.

Government bank balance sheet stress tests are expected to begin next week, and will be required for any bank with more than $100 billion in deposits.

Next Page >>12


Comments Closed

rss feed

Latest Stories

article imageAutomating Ourselves To Unemployment

In this current era of central planning, malincentives abound. We raced to frack as fast we could for the read on...

article imageFed: Waiting For June… Or Godot?

The Federal Reserve left interest rates unchanged yesterday, as widely expected. But the possibility of a read on...

article imageThe Single Best Place To Invest Your Money For Retirement

It was never supposed to be this daunting. At least that's what we were read on...

article imageNegative Blowback From Negative Interest Rates

The Federal Reserve is widely expected to leave interest rates unchanged today. But perhaps standing pat read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.