And so, when you hear Congress saying we need to make sure there are strings attached to this money the Fed loans the banks, i.e. to make sure they are lending it out, that doesn't make any sense at all, because we've already borrowed way too much.
David Beim: It makes not only no sense, it makes reverse sense. In other words, it's nonsense. Because what the banks have done is already lend too much. The name of this problem is too much debt. We have over-borrowed, and we have done that over the span of many, many decades. And now it's reached just an unbearable peak where people on average cannot repay the debts they've got. In the face of that, it is not a solution to try to lend still more.
The government recently revealed the details of its plan to save the banks. Now, remember, there are people out there who are saying the government has to act quickly to acknowledge the problems on bank balance sheets, declare insolvent banks insolvent, and step in aggressively to fix it all. One person who believes that, is Simon Johnson, our former IMF official...
Simon Johnson: Yes, I think there's a level of deceit here. Right, I'm part of "the banks," and I think the government is going along with the deceit far too much. One of my colleagues nicely articulated what should have been our governing principle: "No New Lies." But the balance sheet of these banks is as far as we know a huge lie. They don't want to show you, or even tell themselves, what all these toxic assets they own are really worth. And we're saying, deal with it now, deal with it seriously, deal with the problems in the banking system openly. Or, there will be hell to pay.
In other words, Simon Johnson is saying that every day we delay taking over insolvent banks, the economy gets weaker and the solution gets more difficult.
Well, according to the plan that Obama's administration revealed this week, they have a different view, and they think it's best to go about things with much more deliberation. In fact they recently announced that they're going to take two months to figure out how healthy the banks are -- that's the stress test you've heard a lot about. And then they're going to take another 6 months to give some money to the banks that need it. And they've said, to the media, and to Congress, that they're pretty sure they already know what those stress tests are going to find: namely that America's biggest banks are healthy and that the government will never need to take them over. In other words, the Obama administration is an active participant, with the big banks, in the Big Lie.
So, given a choice between a scary and unprecedented takeover of our banks immediately, . . and much smaller measures where they simply:
- strive to keep the banks afloat,
- don't challenge them too much on the truthfulness of their balance sheets, and
- hope that in time, things will sort themselves out -"
. . they're going with the latter option. However, their public statements did leave them plenty of wiggle room. And of course ... if they WERE planning to take over the banking system ... they wouldn't announce it beforehand. They'd probably say exactly what they're saying right now, and wait till everything's set up, till they've secretly hired enough people and got all their plans in order, and then one Friday evening they'd make an announcement, and nationalize the banks over the weekend.
The bottom line is that solving the banking crisis means that somebody is just going to have to buy up these toxic assets, i.e. the stuff that is poisoning bank balance sheets and making banks insolvent. And one of the main principles behind the Obama Administration strategy is that they are trying to get private investors to do as much of this buying up as possible. So the administration has created all kinds of financial incentives and guarantees for investors to do just that. Ultimately the taxpayers will pay for all this help the government is going to give these investors, but that cannot be our concern right now. Not if we want to avoid economic and financial collapse.
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