Posted by
Andrews on Friday, April 24, 2009 5:03:29 PM
It appears the Treasury may finally be doing the right thing, well the best thing that is likely to happen.
Allow me to explain. I was reading
a WSJ opinion piece on the regulators' inconsistent treatment of two midwestern banks, and the fears among bankers that regulators were "picking winners and losers" based on unknown (or possible no) criteria. That is in itself an interesting topic, and quite a powerful argument against
the entire TARP regime, be it the
Bush TARP or the Obama TARP. However, the line which caught my eye was this:
AmTrust's survival owes something to timing. Last fall, federal
officials hoped that shoving the industry's weakest institutions into
the arms of stronger banks, with financial aid from TARP, would solve
the problem. Since then, it's become clear that shaky banks outnumber
potential buyers. Now, the Obama administration is pinning its hopes
largely on the creation of a public-private entity to buy bad assets
from banks.
If it is true, and I have heard this statement before and seen nothing come of it, it seems the Obama Treasury may finally be doing what I have been saying the government should do ever since the Bush TARP was first proposed.
Now, don't get me wrong, I think
the best course of action is to let the system shake itself out, let the business which might fail fail, and suffer the consequences. If we did nothing it would hurt, but less than any alternative, and in the long run it would minimize the harm and get us through it most quickly. So, my ideal solution (well, second choice ideal solution) is to do nothing. (My ideal is
to return to gold and free banking, but that won't happen this decade.)
However, if the government is going to do something, then buying up bad assets, and that alone, is the best choice. It is the lowest cost for the most benefit. By providing such assets with guaranteed value, it may not even require the government buy those assets. Once they are guaranteed value, then they will be traded once again, and the banks will no longer suffer from liquidity problems. Just promising to buy them may be enough to cure the worst of our ills.
But, as I said, I have heard this before, and I am still waiting. But if it does come to pass, it may mean that things won't be quite as bad as I feared. Yes we still have the massive inflation required to pay for the stimulus package, and we still have the banks being encouraged to make shaky, low interest loans, and thus
perpetuating the problem, and inflation of the money supply will still continue, giving us new booms and busts in years to come, but at least we won't have to deal with
still more bailout attempts.