Why Obama Should Terminate All Federal Reserve and Treasury Programs

Friday morning, before the New York Stock Exchange opens, the President could ride Amtrak’s Acela train to Manhattan. He could stand at the steps of the Federal Hall Memorial at the corner of Nassau and Wall.

1. There, beneath the gaze of George Washington, he could announce that he will immediately suspend or terminate all Federal Reserve and Treasury special facilities, programs, and plans:

Facilities

• Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility;
• Commercial Paper Funding Facility;
• Consumer Lending Facility;
• Money Market Investor Funding Facility;
• Primary Dealer Credit Facility;
• Term Asset-Backed Securities Loan Facility;
• Term Auction Facility; and
• Term Securities Lending Facility.

Programs

• Automotive Industry Financing Program;
• Capital Assistance Program;
• Capital Purchase Program;
• Targeted Investment Program;
• Temporary Money Market Fund Guarantee Program;
• Term Securities Lending Options Program; and
• Troubled Asset Relief Program.

Plan

• Homeowner Affordability and Stability Plan.

As of Thursday, with all of these initiatives in place, the most distressed mega banks trade at price/book ratios that do not exceed 20 cents on the dollar.

If the above facilities, programs, and plans were all eliminated, the price/book ratios of the weakest institutions would drop to no more than 5 or 10 cents on the dollar – tops.

The total assets of the 114 largest US banks – those with assets in excess of $10 billion each - stand at about $10 trillion. If the Federal government acquired these for a nickel or dime, it would spend no more than $500 billion to $1 trillion.

A handful of relatively well-capitalized large banks would remain as independent entities, outside the grasp of our elected representatives.

After the assets of the failed institutions were parceled out to the survivors, the US banking system would look not that different from the Canadian system recently praised by the Chairman of the President’s Economic Recovery Advisory Board - Paul Volcker:

• What [should] we … be aiming for when we get out of the mess? …
• We are going to need a financial system that is not going to be so prone to [severe] … crisis…
• [It] … ought to be a strong, traditional, commercial banking-type system…
• We ought to have some very large institutions …whose primary purpose is … to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit. They ought to be the core of the … financial system…
• Those institutions should not engage in highly risky entrepreneurial activity. That's not their job because it brings into question the stability of the institution. They may make a lot of money and they may have a lot of fun, in the short run. It may encourage pursuit of a profit in the short run. But it is not consistent with the stability that those institutions should be about. It's not consistent at all with avoiding conflict of interest.
• These institutions that have arisen [outside of Canada] … that combine hedge funds, equity funds, [and] large proprietary trading with commercial banks, have enormous conflicts of interest. And I think the conflicts of interest contribute to their instability. So I would say let's get rid of that. Let's have big and small commercial banks and protect them – it's the service part of the financial system.

Are you listening Mr. President? We need you at that corner of Nassau and Wall.

REFERENCES

FDIC - Quarterly Banking Profile, 2008Q3.

Paul Volcker – US Economic Crisis, Toronto, Feb 2009; available at John Mauldin’s Outside The Box, 23 Feb 2009.

Comments

[boats.j:]

Perhaps these free market talkers, these Banksters should learn to survive in the market as it is or die. Isn't that the extremist-capitalist mantra? Why should that apply to everyone except the Banksters?

Feb 27 07:01 AM

[Crocodilian:]

"A handful of relatively well-capitalized large banks would remain as independent entities, outside the grasp of our elected representatives."

Can you name one "relatively well-capitalized large bank" that you believe would remain standing in this scenario?

How would it operate in relation to the rest of the banking sector, which is, in your scenario, owned by (and presumably guaranteed by) the Federal Government?

If %90 of the banking sector had just been seized by the Federal Government, where would _you_ keep your money?

Feb 27 08:07 AM

[monday1929:]

George Washington would be proud if Obama did that, in a perhaps more measured fashion.

Feb 27 08:21 AM

[Ferdinand E...:]

Way to go, Ira. Way to get the attention of the dumbest people in The Apple. And while the President is about it, why doesn't he declare the teaching of economics a crime, and reopen Alcatraz for the perps who think that he is kidding.

Feb 27 08:58 AM

[kelm:]

This is nonsense.

Feb 27 09:16 AM

[Gem Hudson:]

Yes how is costing us more making us more of the money? Because what's paying out more in the money is still going out of business. You are out of business when what is costing isn't making any of the money.

If leaping forward out from all that hundred flower campaign was to make steel in your backyard furnace but what was made was to melt down their American made implements. What they were manufacturing needed an culture revoltuion.
Because producing nothing else for the money is still deficit spending just dropped dead from the deficit death.

Feb 27 09:40 AM

[Ira Artman:]

network.nationalpost.c...

Thanks for comments. Above is link (at Canada's National Post) to transcript of Paul Volcker's comments. Portion (not included in my article) appears below.

Even Paul Volcker, the man who broke the back of US inflation, can't say (at this point) how we get "from here to there." - See below -

What is important is that we have an understanding or conception of what we are aiming at, since only then will we know if we've arrived.

Assuming that (assumption!) that the President is listening to his sole advisor that actually has experience in the taxing business [sorry] of correcting systemic financial failures, then think that we should know what Mr. Volcker is thinking and saying.

Above was simply my attempt (a device) to bring Mr. Volcker's views to your attention in a memorable way.

Hope that it is, or was, successful.

Thanks for reading. Volcker's words below. - Ira
----------------------...

Paul Volcker:
...The system is broken. I’m not going to linger over what to do about it. It is very difficult. It is going to take a lot of money and a lot of losses in the banking system....

So I’ll jump over the short-term process, which is how we get out of the mess, and consider what we should be aiming for when we get out of the mess. That, in turn, might help instruct the kind of action we should be taking in the interim to get out of it.

Feb 27 09:55 AM

[Bill Jencks:]

So where is President Obama going to get the money for all these myriad of lending, purchase, funding facilities?

Out of thin air?

Again?

I'm guessing Mr Artman is an Investor of sorts.
He's certainly not an economist.

Feb 27 10:00 AM

[Amouna:]

This is nice talk, but back to practice my friend. The bubble is already there, with a 500 trillion fongus and a shadow financial system that has outgrown the traditional banking system. If we withdraw these programs and allow Fed and governments programs to stop, how are we on earth going to realistically unwind the derivatives bubble that has been built upon the already sick foundation?

comments please!!

Feb 27 10:08 AM

[Socialism c...:]

Agreed, except that isn't extremist capitalism...it's just plain capitalism!!!


On Feb 27 07:01 AM boats.j wrote:

> Perhaps these free market talkers, these Banksters should learn to
> survive in the market as it is or die. Isn't that the extremist-capitalist
> mantra? Why should that apply to everyone except the Banksters?

Feb 27 12:18 PM

[Al-USA:]

Very good article. But, no amount of blogging about it will get the ruling class to act in a manner that is most beneficial for the rest of the system.

Simply because they don't have to yet...

Only the mobilization of the masses will focus their attention, nothing else will. In the meantime, this recession/depression will drag on for 5/10/16 years, whatever, and with their $trillions in bailout money, they can most certainly ride it out, in luxury.

Still, I appreciate the article.

Feb 27 12:19 PM

[Ira Artman:]

Thanks for reading and comments.

re:
"Where does the money come from for all these myriad of lending, purchase, funding facilities?" [Bill Jencks' question]

I'm not sure I understand your question.

All of those facilities are *currently* effective, they are not some 'hypotheticals' of my invention - they are out there now.

As to specifics of question - I recall an investment bank's old advertising campaign:

"They make money the old-fashioned way - they print it."

Feb 27 01:43 PM