Ready for U.S. Banks To Be Nationalized?

I've recently highlighted some interesting content from websites that I visit on a regular basis. Today's short but unsettling snippet, "Links 1/1008 and a Scary Tidbit," comes from Yves Smith, publisher of another one of my daily must-reads, Naked Capitalism.

Forgive me, but we are going to be a bit lean on posts tonight. I had too much to drink with someone who is terribly plugged in (security clearances AND knows tons of people in academia and the officialdom personally, both here and overseas).

Unfortunately, I can't use many of the specifics he conveyed, but he is a very upbeat sort by temperament but also has been studying the banking/credit mess. He sees us going down the Japan path. Banks will not be technically bankrupt, but will have so many bad assets on their balance sheets, and will have taken hits to their equity bases, that 18 months from now they will be unable to make new loans. They will be quasi nationalized. BTW he said this in a completely evenhanded fashion, as if he was giving a weather report.

This, mind you, comes from someone who has written frequently for the American Enterprise Institute and tells me the Treasury and the Feds are working on this scenario now. This is far more dire than any forecast either yours truly, a constitutional skeptic, or even uberbears like Nouriel Roubini, have been putting forward.

Actually, those who've read my book or who've been paying attention to what I've been writing about here at Financial Armageddon over the past year or so might take issue with that last sentence.

Comments

[helplessobs...:]

A few weeks ago the head economist at GS said the same thing. The shrinking capital base will restrict bank lending leading to a slow down in economic activity. Ah, for the good old days when a lender knew the borrower and secuity ratings meant something. The only satisfaction I can take is "the smartest guys in the room" failed to get all the crap unloaded before investors wised up.

2008 Jan 10 11:33 AM

[SmartGuySto...:]

I read "Creature From Jekyll Island" in college for a banking class at Duke University. I agree that the average person doesn't understand how money works or the Fed's power, but 13 years after "The Creature from Jekyll Island" was printed, we have yet to see any of the extreme scenarios unfold. Personally, I think people are addicted to 'end-of-days' stories and the adrenaline and excitement such stories cause.

Smart people know that money works on the same blind faith as religion. But, hey, religion has had some firm staying power -- so why not the market for exchanging goods and services for IOU's? Most people aren't interested in losing their jobs and learning how to farm in order to re-instate the gold standard. Frankly, people love credit because they would have MUCH LESS without the borrowed dollars. Even the poor in the US have cable TV, cell phones, and are over weight. Who is going to start a revolution and jeopardize that?

You are a wonderful person for exposing the issues with our system, but the extreme talk keeps the mainstream from paying attention to the important things you have to say ...

2008 Jan 10 11:49 AM

[DebtsNMesses:]

Interesting idea. Make the taxpayers pay for the banks foreseeable irresponsibility during the boom. Furthermore, make every man, woman, and child pay for generations to come. This will also wipe out any reason to declare bankruptcy. So all I have to do is "buy" the biggest McMansion I can find, and let the taxpayers pay for it! Woooo hoooo! Free house to all!

Best bailout I've heard yet! Honestly, we don't have to worry about these things. The economy is going to collapse so badly the people will remove these non-public servants (politicians) from office. We are arrogant in our beliefs and will revolt if we are forced to the streets through taxes and/or hyperinflation.

2008 Jan 10 12:12 PM

[Malkiel:]

Banks are chartered and regulated, in exchange for which they are able to offer FDIC insurance. That's how it's been since the New Deal, and the New Deal was handling a crisis of proportions the present one can't even touch. Wall Street and Banks acquiesced in collective policies until the crisis passed, then the banks were left alone. This is the history of this type of event in regard to banks, and I wouldn't expect much difference, except that I don't think we'll even reach the stage where the government will use coercion to get banks to lend and buy mortgages. It's just survivalist fantasy, the stuff of which Ron Paul campaigns are made...

2008 Jan 10 03:35 PM

[Gob:]

Ron Paul!!!!!

2008 Jan 10 04:25 PM

[Sr. Pessimist:]

Unable to make new loans? They should have thought about that in their race to the bottom to commit usury.

2008 Jan 11 06:52 PM

[stocon:]

Oh And please, Let's make sure the Country wide guy gets his 36 million and that's right we'll blame the government for these incompetent HB&Bs blunders.

2008 Jan 12 06:22 PM

[whidbey:]

What horse--- reporting! the central banks of all states have always been directly involved in retail banking and risk management in the private sector. The distinction between private banks and the central bank has always been the capacity of private banks to specialize, and become familiar with a region where central banks can not do so easily. The government role has varied over the years, and that will continue. Let us be adult about things.

2008 Jan 14 05:37 PM