Friday, June 15, 2012

Liquidate the banks, preserve the depositors - a Populist/Libertarian alternative to our economic crisis

There is no such thing as "neutral" economic policy.  All economic policy has an intended focus, an intended set of highest beneficiaries.   The intended beneficiaries (and nakedly, brazenly so) of our current economic policy are the rich.   The super-wealthy class of bankers is being propped up with guaranteed employment via our current policy system. 

In this analysis, we see the unexpected intersection of Libertarian and Populist thinking.    The Libertarians see it as plain as day, as well: the free market is being perverted and prevented from acting as it should.   According to the working of the free market, the banking system should have already been liquidated and rebooted.

We can see clearly now that the current banking order survives for one reason: their control of the political process allows them to extract massive wealth transfers from the masses, in complete defiance of the rules of free market capitalism.

Henry Blodget, in Business Insider, writes of how the market should handle this type of massive banking failure: by allowing the market to punish the professional bankers and investors who sunk their money into this losing scheme.

His analysis is actually more Populist than Libertarian, since he accounts for keeping the economy afloat, and protecting depositors, using governmental power (ideas which a doctrinaire Libertarian would not countenance).    His plan is, in fact, almost precisely what the Jubilee Solution would entail.

In his own words:

The U.S. started this string of bad bank bailouts--making a mistake that the country is still suffering from. And now Europe is following our lead.
The most annoying thing about this is that bank bailouts can work--and they can be done without costing taxpayers hundreds of billions of dollars or rewarding executives and investors for making bad decisions. They just have to be done the right way.
What's the right way?
7 steps:
--Seize the bank
--Fire management
--Write down the value of the bad loans to the amount they are actually worth
--Zero out the bank's equity (shareholders lose everything)
--Apportion the losses to the bank's subordinated debtholders (they lose something)
--Inject new capital in the form of senior debt and new equity
--Refloat the bank (by selling all or part of it).

In a restructuring like this, the bank doesn't stop operating--so the economy isn't screwed.
Meanwhile, the idiots who loaned the bank money and bought the bank's stock take the losses they deserve. And the bank is then immediately rendered rock-solid again, ready to make new loans to companies and countries that deserve it. (And, hopefully, the remaining loan officers are chastened by their prior stupidity and are more prudent next time.)
It doesn't matter how big the bank is--you can do this with any size bank.
And, if necessary, you can do it with lots of banks at the same time. You just need an entity--like the US government or ECB--that has the power to seize and restructure banks before they actually go bankrupt and that can write the massive checks necessary to recapitalize the banks.
That's the right way to bail out banks.  And that's the only way to do it without rewarding stupid, reckless lending and failing to address the root of the problem.

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