Why It's Time to Overhaul the Banking System

We have too many financial institutions and too many people working in the financial trades. "Saving" banks is an even worse idea than saving car manufacturers. "Dusting ourselves off" means taking our losses and moving on; even the losses we incurred in the most recent round of bank bailouts. Sure, we need credit and capital; we just don't need so many people and institutions slicing, dicing, securitizing and providing it.

The goals of bank bailouts have become surrealistic. Check the logic in this paragraph from a New York Times story about the U.K.'s plan for an expanded bank bailout:

Speaking at the prime minister's 10 Downing Street residence in London, Mr. Brown placed the blame for the financial crisis on 'irresponsible lending' by the banks and said institutions that took advantage of the new measures would have to sign a legally binding agreement with the government to provide more credit to consumers and businesses.

In the same sentence, the British Prime Minister accuses banks of making too many loans and promises to force them to make more - and he used to Finance Minister.

A few days earlier both Citigroup (C) and Bank of America (BAC) got more TARP funds. Citigroup got the money so it could sell off its brokerage operation and Bank of America got the money to help it survive its deal to buy brokerage firm, Merrill Lynch (MER). Huh?

When we were being sold the enormous bill of goods called TARP, we were told that bank lending would collapse without it and that all business would grind to a halt. Turns out bank lending collapsed even with TARP and the economy staggered but didn't fall. Now the proposed solution is more bailout for those same banks that both lent too much and are lending too little.

In fact, the U.S. economy is massively deleveraging itself. This is a good thing since it's facing reality and dealing with the consequences of past over-indulgence. It's doing us all the things President Obama told us (correctly) we are going to have to do. But, since we are deleveraging, we don't need as much credit as we had before. We are making bigger down payments on cheaper houses; the price of filling oil storage tanks and the credit needed to finance that has plummeted; our lower credit card balances soak up less credit while our higher savings rate makes more money available. New economy companies like Google run on cash balances, not on credit.

The fact that we are saving more – helped certainly by Federal Deposit Insurance – supplies fuel to banks to make loans. However, Federal Deposit Insurance makes us oblivious to whether we put our money into good or bad banks. We shouldn't repeal Federal Deposit Insurance since it may well have saved us from a far worse crisis. We should end all other subsidies to banks. The ones that are too big to fail turned out to be too big to save – it's time to dismantle them responsibly, with managed bankruptcy and a quick sale of their assets.

When the badly run banks are gone, the survivors will be much stronger. They'll get all of our deposits, and they'll need to put this money to work. These banks will be able to pick among worthy credits (if the government isn't doing all lending) and take a prudent amount of risk.

Further bank bailouts will simply damage the creditworthiness of the whole country. The pound plunged against the dollar and the euro when the latest round of British bailouts was announced. Interest on U.S Treasury bonds and notes rose from very low levels with the approval of the second round of TARP funds here. Ironically, higher treasury yields compete with bank interest rates and make it harder for banks to gather deposits and investments.

The sooner the financial sector right-sizes, the better, because since we are all now investors in AIG and the zombie banks, we are all going to have to take losses in the downsizing. The alternative is throwing good money after bad AND making it harder for well run banks to succeed and to resume offering credit to well-run businesses.

Disclosure: None

Comments

[chtrplyr:]

We also need to wipe out all the "dead" defense contractors and all the "bailout" money 100's of defense contractor companies get annually.

The continual defense contractor bailouts with tax payer money just foster waste, incompetance, poor performance and are a black hole for tax payer money.

Let the whole industry die and the few last remaining might be competitive and profitable.

Banking never needed anual government handouts and provided a much needed service over the history of the U.S.

Then we go after the agricultural industry next.

Jan 22 08:58 AM

[Johnc222:]

All that has to be done to fix this mess....Is to have the U.S. Treasury Null - Void all OTC Derivative contracts written over the last 2 years.

There are 596 trillion dollars of derivatives out there,...could be as high as a quadrillion (1000 Trillion).

Most were written under false pretenses and currupted rating agencies with huge conflicts of interest. The OTC market is corrupt.

It would be benefical and easier to Void or freeze these contracts to be examined more closely. then the alternative which is the total destruction of the World's banking system.

Jan 22 11:18 AM

[Tradememe:]

There is indeed a contradiction. Banks are being asked to be more cautious in their lending procedures and at the same time they are being asked to lend more.

Jan 22 12:29 PM

[vaughn:]

Too big to fail and too large to save? Do both and save the world.

Force the too big to fail bank fail and crame down the throat of senior debts holders to become the new common holders and wipe out all current common, preferred, sub debt holders to save the bank.

voila, all bad debts are wiped clean and the uncle sam spend not one red cent on the rescue.

Jan 22 01:22 PM

[socrateazz:]

You have no real worry about the agriculture industry other than the monies the government spends on mandates like the schools complain of. Did you know most about 86% of the government farm bill help in the farm bill is food stamps and school programs? Probably had no Idea. That is welfare, Is it really wefare for the farmers? I expect most of the US will be shocked when food shortages appear. Will be interesting how a food shortage will affect people! I expect the first reaction will be policies that ultimately cause more shortages. Like action taken to blame big oil for the price increases and attempts to blame the producers who really are taking great risk to produce needed food for little return. Oh well, Wisdom is learned by experience. Beliefs seldom concider the facts. Truth is in actuality not rhetoric of the propagandized.

Jan 22 03:36 PM

[Moon Kil Woong:]

It is funny you mention FDIC insurance. Recently, money markets, mutual funds, and just about every other form of risky asset is being covered by the Fed who will bill the taxpayer for the losses sooner or later without any collateral or insurance payment premium. You got to love that. There are 1,000 shoddy schemes about how to take advantage of the Feds move. Countrywide's ex President has already found one. Buy out the bad bank loans the Fed insures and resell them as Federal insured loans then pocket the premium. Duh... Why didn't the government do this itself. Because financial institutions tell them its wrong for the government to take profit that should be legally theirs. The Fed just helps them think they have an oligopoly on profit from interest you owe.

The easing the credit crisis has turned into how much you can bilk the taxpayer and how much risk you can take and still be fully backed by the government. Why does BoA take over defunct banks when they can't even pay their own bills. Because they know there is no downside. They can try to be a behemoth at the cost to the taxpayer. There is no downside besides going bankrupt which they already are. The free rolling on your money continues.

And all the public knows is what the Fed and Treasury keep repeating like a mantra, "It's good for the economy. It's very necessary. It's the right thing to do. It will stabilize the economy. It will prevent a financial collapse." Right... isn't the right thing to do not to steal money from public coffers for personal enrichment.

Jan 22 09:24 PM