Tuesday, March 10, 2009

More Market Mayhem?

Okay, so perhaps I am a little naive, or maybe just bucking the tide of mainstream thought (again =). But I will ask the question, why can't we let the big financial institutions fail (albeit in an orderly fashion)?

The major argument for not doing this.... It would throw our financial system into a panic.

Well it seems to me, our markets are currently in a panic....credit market conditions are now just as bad as they were shortly after Lehman failed back in September. The stock markets are back to 1997 levels.... I'm not sure how much worse things can get.

The other argument...it would wipe out shareholder value.

Some of these banks are trading for pennies on the dollar. Their value is largely wiped out at this moment. Hopefully individual investors are well diversified, so they won't feel the effects as much. (I recently heard a story of a very wealthy woman living off the dividends of a financial stock....very bad retirement strategy.)

Why can't we add a little fuel the the already hotly burning fire in the hopes that it would burn itself out more quickly? The analogies abound....like taking off a band aid quickly versus slowly.


patient renter said...

why can't we let the big financial institutions fail

The only legitimate reason I know of is because it's not politically acceptable (follow the money). Every other reason is speculation or BS.

Husmanen said...

Maybe I am too analytical, but I have not seen any descriptions of the potential fail of life as we know it supported by data, graphs, process flows, charts, anything. Just a bunch of words basically saying... trust me... it will be bad or worse.

Well, prove it.

Bryan said...

I think the idea is (put again in an analogy) that it's probably better to carefully prune and cultivate the unhealthy tree and tend it back into a reasonable state over time by cutting out the worst parts (by very small degrees) and letting it heal, and then cutting out the next worst parts etc, than to allow it to die and have to take the time to grow a whole new one.

It would take a lot of time to get the infrastructure back in place, which would grind to a halt not just major Wall St transactions, but many Main St transactions. I think even free market economists get real itchy and squeamish about just letting the financial sector collapse. Yes, market forces (under a simple free market theory) are supposed to correct bad decisions with negative consequences, but that theoretical outcome/process is supposed to occur in a million little varied ways sprinkled through an economy, almost seamlessly. I'm not sure that it's meant to be applied to a total infrastructure wipe out of a massively "infrastructured" economy like our own, bankers scattering and stampeding like water buffalo. When the devastation caused (albeit by ever-so-holy free market forces) is at a certain level of magnitude, the negative effects sort of reach a critical mass which multiplies exponentially the probelms, in both length and scope. In a way, this is the difference, between what we might popularly render as a 'recession' and a 'depression'.

The better thing here (goes the current wisdom--not unassailably, but still) is to do one's homework and decide what the problem is on our own (rather than let the free market decide in an End-of-Cretaceous-like moment) and then fix it. But there, of course, is the rub. What precisely is the problem (can we agree?)? And how much pork does it take to solve it? Hehe.

Vanda said...

You know, there are a lot of very good sites out there, that can give you a lot of information about the economy. My favorites are:

and the business section of the New York Times.

My favorite idea for solution is a Swedish style temporary nationalization (think of it as receivership). It would wipe out the share holders, but it would put and end to this shoveling of money into a black hole.

Buying Time said...

"My favorite idea for solution is a Swedish style temporary nationalization (think of it as receivership). It would wipe out the share holders, but it would put and end to this shoveling of money into a black hole."

I agree. I'm just tired of opening my WSJ every morning to find we are renegotiating terms, or throwing more good $$ after bad. If the governmen is going to help the private sector out of this mess.....we need serious financial system reform and a unified regulatory agency (as opposed to the discombobulated patchwork we have now).

Bryan said...

Agreed. I think along with the damage control initiatives, floating around in there, is that somehow after throwing all this cash at them, the banks can just go back to the status antecrisis, and we're all good. Look at how people (and the stock market) are leaping at the Citibank's reported profitability. From some of the comments I've heard, it seems some people hope this was all just a bad dream.

Hopefully, our elected officials, along with whatever measures they take to stop what bleeding they can, will parallel process the regulations/infrastructure/system we're going to need to watch our financial sector from now on. The crisis is becoming increasingly more easy to understand. There is no reason now that it should happen again...if the right tools are put in place.

Instead, a few decades from now, we can choke on some new grand scheme which defies the regulation then in place, and sends us back into the 1700s (minus the tricorn hats).

sacramentia said...

The FDIC taking over is temporary nationalization of the bank. I don't think big banks should get better treatment than the small banks.

Buying Time said...

I especially dislike the idea of government picking winners and losers in an industry. Regulation across the industry is fine by me...but different rules and special treatement for a handful of players is not. Government regulation should be consistent and predictable (tranparent too). These are frustrating times.

sacramentia said...

In another form of mayhem, Obama just signs a bill riddled with earmarks and 8% increases on top of the increases just passed in the stimulus bill. Unbelievable.

RV6Flyer said...

There are several significant reasons why you can't let the huge international banks fail.
First off, main street would freak out. They would lose access to their funds, albeit temporarily, but this could start a huge run on all banks. The combined deposit base of Citi and BofA is almost 1.7 trillion dollars. It's not like the feds can come in on a Friday and have the bank up and running next Monday. IndyMac took months and cost billions to get shored up and handed over to a new owner.
Also, the big money center banks are a central nervous system for commerce. Not only are they processing transactions for its customers, they also act as correspondent banks to tens of thousands of community banks. Letting the likes of Citi go insolvent will end up costing the FDIC and the Treasury many, many billions of dollars to keep it all running, especially when all the depositors hit the exits.
Business relying on lines of credit could be shut down when the cash isn't there to borrow. "Sorry Company X, we can't make an advance on your line because we are out of cash," just don't cut it. It could literally bring the country to a standstill or cost as much or more to fix than just keep them afloat.

Jacob said...

Banks or any business should never be allowed to grow to the point where their failure would be that catestrophic.

BofA, Citi, Wells, break them all up into smaller banks.

NeuronNerd said...

AB, I totally agree with you. I am sick of this business of privatizing profits and socializing losses.

If there honestly is such as thing as "too big to fail", then our problem is the system failed by letting them get too big.