Stimulus and Bank Bailout Fiasco

Just read Yves Smith from Naked Capitalism:

I am so disgusted with this entire proceeding that I am going to dispatch it quickly.

Let’s start with the basics. The US banking system is insolvent. Got that? Insolvent.

It goes on as Smith decries that stimulus bill, the bank bailout, and the Obama/Geithner roll out. What I continue to read from Smith and others is that these insolvent banks need a clean slate – meaning temporary nationalization, recapitalization, and resale. It’s not happening on Obama’s watch any more than it was under Bush.

There are variations on the theme: the government can take them over and recapitalize them, clean them up and re-sell them, a la Sweden; you can wipe out equity investors and bondholders; you can try new twists, like various good bank proposals that have surfaced lately (making new entities out of the deposits and good assets and leaving the dreck with the existing bond and shareholders). While there would be many important details to be sorted out, this is not path breaking, except in the scale at which it needs to occur. And now, having had four acute phases of a credit crunch, the Fed and other central banks have plenty of liquidity facilities ready to deal with any initial overreaction. Rest assured, although radical measures would not be pleasant or easy, there are plenty of models and precedents.

Since we aren’t doing any of the sensible things (ripping off the band-aid quickly), what does all this ultimately mean?

Exactly what I’ve been saying for months. We’re in for a long, drawn-out, and miserable malaise.

The bottom line is, we won’t do the right thing until it’s too late.



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