My Banking System

I think policy makers are currently making the same mistakes about banking that the bankers who got us into this mess made.

No, I don't think Rahm and Larry are writing bad mortgages, but I DO think they're getting so deep in theory and math, nuance and ideology, that they're missing the fundamentals. Here's how I see it:

1) Many big banks are currently being called "Zombie banks" accurately. As awesome as a Zombie Bank would be to blog about, what the term means is that they're still standing--albeit on crutches--but lack the capital to extend credit very far into the economy. They're big, but they can't act like a big bank.

2) Any recapitalization of the banks that would allow them to achieve their former prowess (And I'm thinking of banks like Citi and Bank of America right now) would not only be so large as to be impossible without public assistance for the time being, but the sum of money would also be larger than the net worth of the banks themselves, a net worth which, mind you, is being pushed up right now (talking about market capitalization, the price per share times outstanding shares) by some probability that the government will give a huge gift to the current shareholders, bringing me to point three:

3) Any rescue plan that allows the banks to lubricate our economy the way they once did and facilitate a recovery would either (A) have to come with SOME public ownership of a bank or (B) give a HUGE gift to shareholders and allow them to enjoy most of the upside potential while the taxpayers are left with most of the downside risk.

So I see three options: (1) Don't help the banks (2) Give a huge gift to shareholders and in the process mess up economic incentive structures even more or (3) Have some public ownership of banks.

People are fighting against #1 saying we need to do something, that we're capitalists and we need our banks. People are fighting against #2 saying in capitalism, the losers die out and it is SUPREMELY unfair to lay what might be a ticking time bomb at the taxpayer's feet when any good capitalist would allow for "creative destruction" right about now. And people are fighting against #3 by saying that amounts to communism and nationalization, which isn't very capitalist and any red blooded American should be against it.

Well, they're all right, but they're all wrong. Capitalism screwed up. Ask about the causes and you get everything from poor regulation and greed to messed up incentive structures and lack of understanding of man-made systems and devices. We're going to have to do something that appears at least a little "uncapitalistic" (I'm coining the phrase).

Personally I think from a political fairness principle, Option 3 is the best, though every criticism against it is pretty accurate. But we can't do nothing, and we can't take the risk associated with Option 2. The question should be how to manage public ownership and get it back to private as soon as possible, but we need our banks. To fund innovation, new businesses, infrastructure investment, and put investors and creators together. Without our banks, recovery will be a lot slower, so instead of coming up with half-measures that won't work (odd and sophisticated loan structures, caps on pay which will just send the smartest people fleeing to other industries, "bad banks" and "stress tests"...to name a few), let's start thinking about how to fix the big problems. Let's focus on using taxpayer money and the money we borrow from our children to invest in their future; let's figure out an exit strategy for public bank ownership (there are plenty of good ones); let's figure out how to let the people who take on the risk share in the rewards; and let's stop with the small-potatoes finger pointing, half-measures and PhD level minutiae that's standing in our way.