Jake sends along this Citi chart:
In his economic statement to a joint session of the Congress on Tuesday, U.S. President Barack Obama vowed to curtail a banking crisis in order to prevent, in his apt expression, an "open-ended recession" – the very thing that has so many North Americans and Europeans in turtle mode these days, many fearing another Great Depression.
Trouble is, Obama's bank-rescue strategy, by working as much as possible within the bounds of the status quo, is markedly similar to the ineffectual solution attempted by the previous administration. The same strategy by which banks are hoarding funds to shore up their dwindling cash reserves, rather than lending and unleashing the credit that is the lifeblood of a healthy economy.
Lest any ideological feathers be ruffled, Obama's plan goes by the name of "a public-private investment fund." When Obama's vague and overly complex proposal was formally unveiled by Treasury Secretary Timothy Geithner on Feb. 13, it laid a bomb, triggering a three-digit decline in the Dow Jones industrial average that day.
Sweden, as is widely noted, nationalized most of its banking sector during a similar crisis more than a decade ago, cleaned it up, and promptly returned it to private ownership. Japan, by contrast, during its so-called "lost decade" of flat GDP growth in the 1990s, allowed itself to be intimidated by its biggest, crippled banks, and let them limp through the decade under their own diminished power, dragging down the world's second-largest economy with it.
Americans have a powerful aversion to "nationalization." Yet one of America's greatest virtues historically is that it puts aside market-first claptrap in times of crisis and consigns cowboy capitalism to some quiet time, however briefly.
Examples include Franklin Roosevelt's "Bank Holiday" of 1933 and his subsequent Home Owners' Loan Corp. Much more recently, the Resolution Trust Corp. in the early 1990s stabilized the go-go savings and loan sector that had come to grief, leaving the healthy S&Ls alone and absorbing the feckless ones and their soured assets, ultimately selling them off at a profit.
If nationalization is such a retrograde option, someone will have to explain why the administration of George W. Bush last year swiftly nationalized American International Group (AIG), the world's largest insurer, and mortgage giants Fannie Mae and Freddie Mac.
It's time for Americans to acknowledge that some of their biggest banks already have been nationalized in all but name.
With its frequent cash injections, Uncle Sam now owns about 40 per of Citigroup Inc., once the world's largest bank, and a sizeable chunk of a troubled Bank of America Corp. as well.
And it will continue this way, argues Peter Morici, a University of Maryland professor remembered for his gloomy testimony to Congress last year on the banking mess.
"As housing prices fall," Morici wrote this week, "the banks will have no place to go but the government for the capital to cover losses, and their ownership will pass into government hands, first Citigroup and then others."
American lawmakers need also accept that some of their country's biggest banks are effectively insolvent. "At last count, Citigroup had about $23 billion in tangible common capital supporting almost $2 trillion in assets," the online Motley Fool investment newsletter wrote Monday, as Citi was seeking its third bailout in as many months. That's "about as close to failure as you can get without collapsing."
There is a better way out of this miasma. And a global economy held hostage to the fits-and-starts rescue schemes in Washington since the crisis began with the 2007 implosion of a record housing bubble finally would like to see it. Good grief, even Ayn Rand acolyte Alan Greenspan, former chair of the U.S. Federal Reserve, recently allowed that a "temporary" takeover of troubled banks is an option that must be considered.
America should move swiftly to take complete control of Citi and Bank of America, replacing conspicuously incompetent top management who now cavil that their pay might be capped and have been otherwise intransigent in recycling taxpayer bailout funds back into the economy.
It has been said that shooting an admiral from time to time encourages the others. Cleaning the stables at these two disaster-prone lenders would be instructive to the 8,000 other U.S. banks that would like to retain their independence.
Morici wrote this week of the "vicious cycle" by which the continued decline in U.S. house prices is devaluing all homes by increasing the glut of vacant properties on the market. That puts ever more homeowners at risk of default as their mortgages come to exceed the value of their homes, and more banks at risk of insolvency.
Morici is not alone in arguing for a federally sponsored "bad bank" or "aggregator bank" – not unlike the RTC – to make a quick end of this crisis by sweeping the banks' dubious assets into federal hands, and let the government rather than a private sector that has shown itself reluctant on this score to "determine the number of (future) defaults by performing triage on mortgages – deciding which homeowners if left alone will pay their mortgages, which if offered lower interest rates and moderate principal writedowns could reasonably service new loans, and which must be left to fail."
Obama should be thinking of FDR's words in describing the "bold, persistent experimentation" by which he meant to lessen the hardship of the Great Depression.
"It is common sense to take a method and try it," FDR said in 1932.
"If it fails, admit it frankly, and try another."
Governments seldom do admissions of failure. But for the sake of the world economy, it's time Obama tried another method.