I have been hearing about how we as in “We the people…” have to fix the banks so they can lend money again. Many options have been discussed and it looks like the President is strongly leaning toward a “Bad Bank” type of rescue where toxic securities will be dumped into a newly created institution. It’s a magical place where bad debt bets will disappear like tears in the rain, of course, with taxpayer help. This has never been done before on a scale this large, so no one really knows exactly what the consequences will be or if it will even work. NYU economics professor Nouriel Roubini predicts that the losses for the banking system could be 3.6 trillion and is “effectively insolvent.” Just about a year ago Roubini said the bank losses would be 2 trillion bucks. Fact is, no one knows for sure how much this may end up costing because the toxic securities (OTC derivatives) are very, very difficult to price. In many cases they could be worthless or worth a lot less then they can ever get on the open market. In a year from now the number could be 7 trillion in bank losses, who knows! The toxic asset picture is a moving target but, one thing is for sure, it will be many trillions in losses by the time it is finally cleared up.
My question is if the banking system is “insolvent” and it’s unknown how much this will cost then why is the “default option” not in play here? Famed investor Jim Rogers says the insolvent banks should be “allowed to fail.” Then the assets would go from the incompetent to the competent. There are hundreds of small and medium sized banks that did not invest in toxic securities and are financially sound. In short, the incompetent banks would be liquidated and competent banks would take over the assets that are left behind. Instead, the pundits of Wall Street are basically telling America,” You make us (the banks) whole first and then we will lend you your money back!” That is simply outrageous because we are rewarding the incompetent!!!!!!!
Remember, incompetent and foolhardy bankers are the cause of this “credit crisis” in the U.S. and the rest of the world. Letting those banks take the hit for their ill advised, reckless investments biased on greed will do many things. Here are just a few. Letting the reckless banks fail will limit taxpayer exposure and preserve our capital and our credit rating as a country. Bank failure will wash bad debt out of the system once and for all and protect the dollar from free fall. Finally, I think in the end it will be cheaper and more effective than what has and will be done in the future to “fix” the credit crisis.
In default, the incompetent banks, the bond holders and the share holders will get completely wiped out. Yes, there will be plenty of pain to go around but that is coming anyway. All the capital injections and bailouts and “Bad Banks” just put off judgment day and make things worse for the country. The idea that somehow we as a nation do not have to pay for our financial sins is a farce. The only people that should be protected with taxpayer money (even though it will cost trillions) are the depositors. Without depositors you do not have a banking system. Depositors are savers and that is what is needed for capital formation. We do not need anymore debt formation. Warren Buffet wasn’t able to get 10 percent interest for loaning billions to Goldman Sachs or GE because he had a good credit score. He got preferential treatment because he had capital (yes… cold hard cash) to invest. The way I see it, the less time we drag this problem out, the faster we can truly put it behind us. Right now the “default option” is voluntary, but if we get this wrong and do not really fix this problem, then default may be forced on a lot more people than just the incompetent bankers.