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February 18, 2009
Carpe Bankum
In the roller-coaster ride of proposals and revised proposals for rescuing the nation’s banking, credit, and mortgage systems, I was happy to see the president suggest rewriting bankruptcy laws. It’s fine to offer consumers a chance to, essentially, refinance their existing loans and save a bit on their monthly mortgage payments through a reduction in interest rates. But giving them no option to write down the principle, especially when it exceeds the current market value of the house, is tantamount to punishing the homeowner exclusively for an “arguably” poor financial decision they made in partnership with a bank. And it’s not even a case of “financially” rewarding those banks, since a high percentage of those loans will default anyway. The only reason for maintaining fictitious home values is that they maintain fictitious bank asset values—a particularly vulgar excuse to throw families out of their homes. Rewriting the law to permit a bankruptcy judge to write down a loan to properly reflect current values will protect both homeowners and “legitimately viable” banks.
But wouldn’t it be nice if we didn’t have to go that far? Or, more to the point, force troubled homeowners to go that far? Joseph Stiglitz and others have been argued that it's time to nationalize the banks--or at least the bad ones. Stiglitz argues:
It is standard practice to shut down banks failing to meet basic requirements on capital, but we almost certainly have been too gentle in enforcing these requirements. (There has been too little transparency in this and every other aspect of government intervention in the financial system.)To be sure, shareholders and bondholders will lose out, but their gains under the current regime come at the expense of taxpayers. In the good years, they were rewarded for their risk taking. Ownership cannot be a one-sided bet.
Of course, most of the employees will remain, and even much of the management. What then is the difference? The difference is that now, the incentives of the banks can be aligned better with those of the country. And it is in the national interest that prudent lending be restarted.
There are several other marked advantages. One of the problems today is that the banks potentially owe large amounts to each other (through complicated derivatives). With government owning many of the banks, sorting through those obligations ("netting them out," in the jargon) will be far easier.
If this is a little too logical, or if a left-wing Nobel laureate provides too little political cover, then how about Alan Greenspan? In an interfiew with Financial Times, he acknowledged:
"It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”
Works for me.
Posted by stevemack at February 18, 2009 11:58 AM
