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Tuesday, September 30, 2008


Congress has rejected the rescue package. I think that that is a good thing though I have also said that the B&B bailout was a good thing. The difference is that the US deal was to completely save the American bankers by taking only the really bad loans off their hands, thus rewarding incompetence. We, on the other hand, are protecting only the depositors & loaners to B&B & restructuring (ie shrinking) the industry. The American bail might have provided short term comfort but would almost guarantee repetition by not removing the moral hazard. All the calls for more regulation which would, in practice, only institutionally prevent new solutions.

The B&B solution may well actually make a profit for the taxpayer in the end, unless house prices fall much further, because the taxpayer has their good loans as well the "toxic" ones.

What solution should America do. I think they should institutionalise a new form of bankruptcy for financial institutions whereby they take over, without compensation to shareholders, any bankrupt bank & then back its debts. This would prevent runs, as happened with the Northern Rock fiasco, which our government did mess up. The administrator would then run it & sell off whatever he could in the normal way. My guess is that, since despite all the claims this is not a "worldwide" crash China & the oil states, which are both awash with cash, would be willing to purchase/invest in restructured banks which they were confident weren't going to disappear. The Lehman crash for example took down $800,000,000 from Norway's oil fund.

An interesting thing about the failure of the US bailout is that it clearly happened because Congresscriters found their constituents were strongly against it. The establishment tried to bounce them into this by all sorts of scare stories, not wholly unjustified. They failed. This suggests that the ordinary US citizen has considerably more respect for & faith in free marketism than their leaders. This is one pretty hopeful sign for the US, at least over the long term.

I said previously that the solution is ultimately to give up the idea that we can all get rich in the "post industrial economy" by selling pieces of paper to each other. Kipling said the same earlier,
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

Fortunately technology is still progressing & we are capable of producing far more wealth than ever in history. However well the Chinese are doing they do not, yet, have our technological capacity. If only the government supported parasites were taken off our backs there is literally no limit to what we could achieve. The Gods of science have been very good to us.

I think they should institutionalize a new form of bankruptcy for financial institutions whereby they take over, without compensation to shareholders, any bankrupt bank & then back its debts.

No, just let the bank file for bankruptcy reorganization or bankruptcy liquidation. The US Federal government is on the hook for about $100k in account insurance, but after paying that let the rest of the bank fail. The long term solution is to separate the depository function of banks from the investment (interest earning) part. If the public wants interest it can buy bonds, but no one should be allowed to earn interest on money in an account that is supposed to available for paying debts.

If the government bails out a purely financial business it is just giving money to people who would be better employed picking spinach or cleaning toilets.
What I am proposing is pretty close to reorganisation except that deposits are fully secured including loans by other banks. Since much of the current problem is caused by a refuasl of interbank lending I think that is a price worth paying but accept there is no absolute answer.
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