Ransome

Colonial Bank Failure Highlights the Problem

I realize that this is Seeking Alpha, I get a chuckle from people that want to make money on the collapse of the economy.

The problem was the securitizing banks created bad paper. The Fed bailed them out for a specific purpose, they were systemic and too interconnected. The mistake was not recalling the toxic loans. They continue to fester and get passed around hoping to get government backing. The solution is not goofy accounting or closing banks. A government bad bank needs to get the loans off the market. Buying the loans capitalizes the banks, this is how it should have been done from the beginning. Restructure the loans to reflect the current economy. The government does not need to lose in the long run.

No new security should be allowed that can not be recalled and unwound, even if bundled. These loans, which now include commercial loans are no different than toxic pet food. They were made under distorted and sometime fraudulent conditions, get rid of them. The entire effect is systemic and it is preventing a recovery. Closing banks has no effect on anything and it is just throwing money away. All the moral hazard people will squeal like a stuck pig but it needs to be done. The government allowed this stuff on the market and they are the only ones big enough and motivated to fix the problem. Bailed out solvent banks could care less, they are making millions trading, it is someone else's problem

Coming Soon: Banking Crisis of Historic Proportions

I was pondering the collapse of the housing bubble. Poor quality lending created securities that were not money good. But the lax lenders were not the only to suffer, homeowners, even those that sat on the sidelines castigating their imprudent credit leveraged neighbors, all suffered tremendous wealth destruction. Far more than the bubble wealth.

The chaos theory seemed to explain this phenomenon. A butterfly beat it's wings and decided that no doc loans and other types were profitable and the entire lending and borrowing enterprise adapted, throwing us over the edge into a death spiral that continues to uncontrollably expand as the chaos theory predicts. The Fed's attempt to correct the death spiral was too late, too focused and too weak, much like fighting a forest fire that has spread into discrete child fires. As chaos continues to spread, we will experience the uncertainty and the fallout until the children fires are contained. Predictions will simply be guesses.

Some are looking at regulation to prevent a repeat. Some endorse self-regulation. Some endorse watching the fires burn. Certainly if enough participants raised the alarm, it might have allowed the retreat from the cusp of chaos. If a majority of the transactions were win-win and market discipline maintained, lending would have been self-limiting when the supply of truly qualified borrowers was depleted.

Rescuing the too-big-to fail affects chaos direction but does not contain it nor is the selective approach necessarily positive. It may in fact create new chaos. A comprehensive approach is necessary if intervention is to be successful, and the government is the only entity large enough to intervene. Without discipline, we may be in a permanent state of chaos. It is apparent that the consumer is already attempting to restore discipline.