Daily Dose: Nationalize the Too Big to Fail Banks?

The Financial Times has a good article that illustrates the amazing shift in thinking among our leaders.  Not only has Lindsay Graham come out in favor of a nationalization of the most insolvent banks, so has Alan Greenspan.

In an interview with the FT Mr Greenspan, who for decades was regarded as the high priest of laissez-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

The WSJ’s Real Time Economics blog chimes in with this:

“All of the sophisticated mathematics and computer wizardry essentially rested on one central premise: that enlightened self interest of owners and managers of financial institutions would lead them to maintain a sufficient buffer against insolvency by actively monitoring and managing their firms’ capital and risk positions,” the Fed chairman said. The premise failed in the summer of 2007, he said, leaving him “deeply dismayed.”

Self-regulation is still a first-line of defense, Mr. Greenspan said. But after the financial collapse of 2007 and 2008, “I see no alternative to a set of heightened federal regulatory rules of behavior for banks and other financial institutions.” He said hoped hoped it would come in the form of tougher capital requirements for banks.

His comments echoed testimony of the former Fed chairman made last October, when he acknowledged his state of “shocked disbelief” at the market turmoil.

Of course, Greenspan is one of the culprits behind the mess we’re in.  He was the master of deregulation during his tenure.  He also repeatedly denied that there was a housing bubble or that any action should be taken to cool the housing market.  The “Greenspan Put” was always counted on by the markets to bail us out whenever moral hazzard became too much of a concern.  He was a careless cheerleader for too long, rather than a careful steward of our economy.  He is doing whatever he can to burnish is reputation now, but is truly is one of the bad guys.

“Worse than Japan?”

That’s the title of this recent article in The Economist comparing our current financial crisis with recent similar crises in Japan, Sweden, and elsewhere.  It’s a good, in-depth article going over the bewildering complexity of the problems we are facing and comparing them to past historical precedents.

If you want the bottom-line, here’s the concluding statement:

Add all this together and the ease with which American policymakers dismiss Japan’s experience is probably misplaced. Japan’s outcome—a decade in which growth averaged 1% a year and gross government debt rose by 80 percentage points of GDP—was not one to be proud of. But given the magnitude of today’s mess, it may soon seem not that bad after all.

Daily Dose: Nationalize the Too Big to Fail Banks?

I am not one to get too excited about getting something right when most others were getting it wrong – I’ve been wrong too many times.  But based on the weekend news it does look more like Geithner’s plan was much better than the initial reviews indicated. Here’s a video of republican senator Lindsay Graham over the weekend saying we may have to nationalize some banks.

As I mentioned immediately, the key aspect in Geithner’s plan had to do with his “stress testing”.  You had to read between the lines, but it seemed to me at the time, and now is obvious to most, that he was talking about nationalizing the banks.  He just was not ready to announce which ones.  A prudent approach.

On a personal level, as an employee of one of the Too Big to Fail Banks that is clearly insolvent and should probably be nationalized, it will be interesting to go through the process.  As the faux Chinese curse goes, “may you live in interesting times”.  I am sure we will not all be shown the door.  The world economy cannot tolerate another Lehman Brothers fiasco since we really are Too Big to Fail.  My bet is that if we do fail the stress test we will be broken up into smaller pieces, at least that would be the right thing to do.

How Do You Define Depression?

That’s the title of a Real Time Economics blog entry in today’s WSJ.  While there is no formal definition of depression, 30% of all Americans now think we are in one.

The latest survey by the Pew Research Center, conducted February 4-8, found 30% of the public saying the nation is “in depression,” up from 22% in October. About 57% say we’re in recession.

Muni Manager Conf Call Notes

Some highlights from a well known muni bond fund management team conference call on 2/4.  Notes provided by a 3^rd party.  I continue to believe that the muni bond space offers extremely attractive opportunities for retail investor’s taxable accounts.

Amazing Video

This video is making its way around the Internet right now.  From a C-Span interview just 3 days ago.  Worth watching if you have not already.

The Capital Markets Subcommittee Chair, Rep. Paul Kanjorski of Pennsylvania, tells C-Span how the world economy almost collapsed in a matter of hours.

At 2 minutes, 20 seconds into this C-Span video clip, Kanjorski reports on a “tremendous draw-down of money market accounts in the United States, to the tune of $550 billion dollars.” According to Kanjorski, this electronic transfer occured over the period of an hour or two.

Kanjorski: “The Treasury opened its window to help. They pumped a hundred and five billion dollars into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn’t be further panic and there. And that’s what actually happened. If they had not done that their estimation was that by two o’clock that afternoon, five-and-a-half trillion dollars would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.”

“It would have been the end of our political system and our economic systems as we know it.”

I remember this time last Septmenber.  The report I read was that Paulson and Bernanke went to Congress on a Thursday and told them that they had to have $700B to inject into the banking system or the economy would cease to exist by the next Monday.  This seems to be confirmation.  Equally chilling is that this Subcommittee Chair states that we are in no better shape today than we were then.

Conference Call Notes

I listened in on another conference call with a big money manager with an enviable track record. These guys remain very concerned about the near-term outlook and have only a net 17% long equity exposure (meaning they have hedged much of their long position). Cash, gold bullion, and bonds are their main holdings, in that order.

The real item of note in the call was their “incrementally more positive” view on China. Their argument is that China is being much more effective than other governments around the world in enacting stimulus policies. New infrastructure projects are already underway. They remain cautious, however, as while these projects may be stimulative they want to see evidence of profitability before increasing investments.

That being said, they noted that the Shanghai A-share market is up 12% so far this year, which is a welcome indicator. I’m glad to be an investor with them.

“We Hate You Guys”

Today’s Financial Times has this refreshingly candid story.

China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday.

…

Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York on Wednesday that China would continue to buy Treasuries in spite of its misgivings about US finances.

“Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion. . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

The Final Stimulus Bill?

As someone who believes the school of thought that government action is needed in times of economic crisis I am glad that the stimulus bill is finally through Congress.  It does not signal a short-term recovery, however.  As noted in today’s WSJ,

The latest version of the economic-stimulus package is expected to provide less near-term support for the economy and make it less likely that the economy will pull itself out of recession before late this year.

The stimulus bill could have done a couple of nice things: provide short-term stimulus or provide a psychological boost to the markets.  It will do neither.  On the other hand, I believe it will help keep us out of an extended recession/depression.

Recovery this year, or perhaps even early, next seems overly optimistic at this point.  A Japan Scenario is the real fear I have and this bill may help us avoid that.

Daily Dose: Nationalize the Too Big to Fail Banks?

Of course, the real issue in front of us right now remains whether or not to nationalize the worst of the Too Big to Fail Banks.  As reported in the NY Times, Geithner’s “stress testing” is already starting as regulators have descended on Citigroup, BofA, and others.  Nationalization may be one of the outcomes.  Until this issue is resolved the markets will remain on edge.

As Martin Wolf says in the Financial Times,

The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once.