For this is a problem of solvency, not liquidity……
GREED & fear would also say that offering private investors non-recourse taxpayer-financed financing to buy asset-backed securities is also not in keeping with the times. And indeed it is likely to prompt a hostile response from Joe Sixpack. In this respect nationalisation of the bust banks and separation of good assets from bad assets is the only honest way forward, politically, for dealing with the current escalating mess in the American financial system. In this respect GREED & fear is of the view that ordinary Americans want to be told the truth and are fed up with gimmicky solutions involving adding debt on debt. It is also the case that the Obama administration risks a populist backlash on any policy based on bailing out banks. This is why it is even more amazing that Obama does not understand the political appeal of the nationalisation option.
I would agree whole-heartedly with thrust of this argument. President Obama has a limited window of opportunity here. He will need to decide the correct path and delegate appropriately. Sidelining Paul Volcker for Larry Summers does not leave one with a good tingly feeling. Bailing out banks when populist sentiment is rising shows a tin ear to the shift in national sentiment. On the whole, I am very worried that Obama does not see the poor optics of all of this. Politically, this is not a good plan.
When Obama spoke to Terry Moran of ABC News about all of this recently, he suggested that his plan is actually crafted because — despite rising populist sentiment — Americans will not tolerate nationalization. The exchange went as follows.
MORAN: There are a lot of economists who look at these banks and they say all that garbage that's in them renders them essentially insolvent. Why not just nationalize the banks?
OBAMA: Well, you know, it's interesting. There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what's called "The Lost Decade." They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn't see any growth whatsoever.
Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. (LAUGHS) We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn't make sense. And we also have different traditions in this country.
Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America's different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.
And so, what we've tried to do is to apply some of the tough love that's going to be necessary, but do it in a way that's also recognizing we've got big private capital markets and ultimately that's going to be the key to getting credit flowing again.
I suggest that Obama try yet more ‘tough love' because this plan is not going to cut it.
Fiasco - Christopher Wood, CLSA
Obama: No ‘Easy Out' for Wall Street - ABC News
No Tough Love for Bankers - Robert Scheer, The Nation