Ricknplano

The Great Bank Rush of 2008: What's the Money For?

We had a temporary problem when the money market funds went to negative territory. Extending government guarantees to those funds solved that problem within two days. But that put a scare into the markets, the institutions who hold large amounts of money market funds and into the treasury and Fed. Also the relatively low FDIC coverage of $100,000 makes wealthy depositors quick to create a run on any bank with a hint of problems. Raising the FDIC limit to a million dollars per depositor plus the gov't guarantee of money market funds was and is sufficient to calm and fix these markets...at least until the Sec of Treasury and Fed Chairman showed up at Congress saying the sky is falling, which created its own panic.

With several weak banks that should have failed, including WAMU, failing Congress has swallowed the Cool Aid and decided to use a sledgehammer to swat a fly. Yes there was some weakness in credit markets. Some banks needed to fail due to poor management but we have seen the good banks swirling around them like vultures waiting for the certain death. After the dust settles the same loan officers will still be making loans to the same customers but the bank name on the documents will change.

Some other tweaking of the credit markets like establishing an exchange for Credit Default Swaps (CBOE, Mercantile, et al) and reinstating the uptick rule and also reinstating the 8% margin limits that our good Senator Gramm got repealed in 1999, all these changes are sufficient to fix the markets.

Will my suggested changes prevent a recession? No, but transferrring wealth from taxpayers to banks will not either. Taxpayer cash for Wall Street Trash is a bad deal. Unfortunately convincing congress that the sky is not falling seem impossible.