It’s interesting that, to a lot of people in the non-specialist press, the key question respecting the banking system is the “N” word: whether or not we should nationalize troubled large banks. There’s quite a lot more to the story.
It’s true that we have a lot of large financial institutions at or near the fuzzy edge of insolvency, given the losses they’ve experienced on mortgage-backed assets. It’s also true that we’re having a recession characterized by a sharp decline in the amount of credit available to consumers and smaller businesses.
So it seems pretty simple: fix the first problem, and you automatically fix the second, right? Not so fast.
Most of the discussion centers on what it might take to open up the balance sheets of the largest banks. They’re holding vast portfolios of assets that have declined sharply in value on a current market basis, but have declined only moderately in terms of their stable long-term value.
What does that mean? It means that if you sell a mortgage-backed security today, you’ll receive a fire-sale price. But if you hold it to maturity, you’ll realize almost the entire value of the asset.
(Part of the calculus here is that Congress and the FDIC have deemed it politically unacceptable for people to default on mortgages. So there’s an arbitrage between the real default risk of a typical mortgage, which is reflected in its current market value, and the realizable value in the long term. The government won’t let these assets lose value.)
So on a hold-to-maturity basis, most of the large banks are not likely to fail. (Citigroup is an exception because it’s half bank and half broker/dealer. Arguably, Citi is functionally insolvent now, absent massive government support.)
So why would we want to even consider nationalizing these entities? Because they’re at the edge of their asset-carrying capacity now, and can’t raise new capital. That translates into little or no net new credit for economy. The nationalization idea (and neither-fish-nor-fowl ideas like Tim Geithner’s toxic-asset rescue plan) contemplates recapitalizing the banks with public money.
You could argue against this on free-market grounds, but free markets seem like a gauzy memory now anyway.
What’s more important is that the loss of new bank credit isn’t what’s driving the credit crunch in the first place.
Up until 2007, banks provided perhaps one-third of the credit in the United States. The rest came from the asset-securitization markets (the so-called “shadow banking system”), which has now come to a near-complete halt. We should be asking what it will take to bring securitization back.
Let’s say we follow through on one of the various plans to finance the huge wad of overpriced mortgages that are currently in force with public money. And let’s assume just for fun that we can print or borrow enough money to do that without consuming too much of the world’s private capital.
Does that mean we’re going to encourage companies like Bank of America and JP Morgan Chase to start expanding powerfully, into the gap left by the retreat of securitization? Weren’t we already concerned that they were too big to fail?
And in any case, shadow-banking finance depended greatly on the use of extremely high leverage ratios, once available to hedge funds and Wall Street firms, but never available to banks for on-balance sheet assets, and certainly not today. That financing model won’t be coming back either.
Bottom line, nationalization isn’t going to do much harm, or much good either. What we really need to do is prepare for a world in which capital is scarce and expensive, compared to the recent past.
Precisely. Pity poor Arlen. Neither Democrats nor Republicans now trust him, so he’s screwed no matter which way he votes. If Specter had any residual sense of intelligence and grace, he’d vote his conscience on EFCA…and then immediately announce his retirement from the Senate after his current term expires.
“It is difficult to believe that union bosses in Washington think they are able to buy a vote in support of the misnamed Employee Free Choice Act.”
Why is this so difficult to believe?
It seems to me that there is a significant difference between what the AFL-CIO is offering compared to what they might have been offering say fifty-five eyars ago.
It is entirely legitimate to say ‘Our large membership will vote for you if you support this legislation which our members favor.” That’s what campaigning is all about, no?
It is not so, if you are saying “Our small, but wealthy, organization will give you money, resources and help – but not so much votes, because we don’t have any – if you support legislation which helps us get even wealthier.”
Maybe the AFL-CIO lives in Blagoland. But maybe they are still in the 1950s.
Based on the headline, it sounds like an offer of a bribe to me!
Hey, I trust Specter! I KNOW he can’t be bought! Why? Because, I believe he’s already been bought and he got such a good deal, he’s going to stick with it.
For his support on the pork bill, Obama promised Specter that he would be named to replace Ginsberg on the US Supreme Court when she resigns at the end of the session “for reasons of health.” Specter is an arrogant SOB and wants his resume to end with more flare.
It’s an easy deal for Obama because Specter’s health is so bad that he will have to be replaced before the end of Obama’s term. It means that Obama can tweak the deal whenever he wants and the card check is one of the tweaks. Obama (Emanuel) will convince his labor pimps that it was Obama who persuaded Specter to support their side.
Doesn’t his have a “Faust” like ring to it. Specter will make any deal with any devil to keep his power.
No matter what Arlen does, he is toast in PA. He might as well pad his retirement account with all he can get. Pity us poor Pensyvanians, we are represtented by Arlen (Benedict Arnold) Spector and Robert (Obsequious Pile of Mush) Casey.
#5 writes “Specter is an arrogant SOB and wants his resume to end with more flare.”
Flare indeed!
The RNC needs to BOOT SPectre, COllins and SNowe out of the party, run people against them in the primaries and not give them ONE DIME.
I refuse to give the RNC any money until those 3 traitors are GONE.
SPINKTER IS A LOOSER!!! OF COURSE HIS VOTE IS FOR SALE, THATS WHY THE OFFER WAS MADE….IF HE CAN PUT THE RIGHT SPIN ON IT AND MAKE IT LOOK GOOD FOR THE PEOPLE OF PA HE WOULD DO IT. 2010 VOTE TOOMEY………………
Specter has already gotten payoffs for voting for the Spendulus. In particular, he 5.5 mil for the Park Service to plant a giant Mecca-oriented crescent on the Flight 93 crash site.
Specter is the only Congressman who actually knows about the Mecca-orientation of the giant Crescent of Embrace. He knows this is a memorial to the terrorists, and is pushing it anyway.
Details at my link.
The last time ol’ Arlen came up for reelection the Republican party was all over any objection to the jerk with the excuse that he was, after all, a Republican and every Republican vote was critical. RINO Arlen has since taken his critical vote to the Democrats every time it was critical to the Republicans.
Meanwhile, Wisconsin, the birthplace of the Republican party, has two Democrat senators. How does that happen? Do you suppose it might have something to do with diverting support for Wisconsin Republican candidates to more “strategic” races like Arlen Specter?
Republicans are indeed the stupid party.
—For his support on the pork bill, Obama promised Specter that he would be named to replace Ginsberg on the US Supreme Court —
Do they have a Scottish translator?
Specter is worse than all of you imagine. He has his own set of priorities from his life like unions (father) and health (he got lots for NIH) and other various ideas (almost ideals) that have nothing to do with the party. So you can’t count on his position on anything. You just wait for the next whim and pray. We almost got rid of him last time but Bush thought he was worth saving, LOL
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, I rate this post for 4/5. Decent info, but I have to go to that damn yahoo to find the missed parts. Thank you, anyway!