{"id":300,"date":"2009-04-13T11:19:28","date_gmt":"2009-04-13T15:19:28","guid":{"rendered":"http:\/\/000af36.netsolhost.com\/wordpress1\/2009\/04\/13\/imf-economist-says-us-needs-to-rein-in-the-too-big-to-fail\/"},"modified":"2009-04-13T11:19:28","modified_gmt":"2009-04-13T15:19:28","slug":"imf-economist-says-us-needs-to-rein-in-the-too-big-to-fail","status":"publish","type":"post","link":"http:\/\/griendling.com\/wordpress1\/2009\/04\/13\/imf-economist-says-us-needs-to-rein-in-the-too-big-to-fail\/","title":{"rendered":"IMF Economist Says U.S. Needs to Rein In the “Too Big To Fail”"},"content":{"rendered":"

I\u2019ve posted on several occasions (example here<\/a>) on the question of why the Obama administration isn\u2019t talking about regulations that prohibit companies from becoming systemic risks to the the nation\u2019s economy.  We hear a lot about these institutions, which are invariably described as being \u201ctoo big to fail.\u201d  So why aren\u2019t we preventing companies from becoming too big to fail in the future.<\/p>\n

I was beginning to think that it was a stupid question as I don\u2019t see news articles discussing this.<\/p>\n

Well at least now I have someone more reputable than this poor blogger saying that\u2019s exactly what we need to do.  Former International Monetary Fund Chief Economist Jim Bourg lays out in the May issue of The Atlantic <\/em>how the economic crisis in American is not unlike those he sees in developing countries.  The prescriptions the IMF usually lays out<\/a> can apply to the U.S.<\/p>\n

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Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause\u2014Lehman was small relative to Citigroup or Bank of America\u2014is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider. <\/p>\n<\/blockquote>\n

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The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary. <\/p>\n<\/blockquote>\n

Bourg\u2019s says the best way to fix the problem, expensive though it may be, is to nationalize the bad banks.<\/p>\n

\n

Nationalization would not imply permanent state ownership. The IMF\u2019s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC \u201cintervention\u201d is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse. <\/p>\n

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership\u2014recognizing reality\u2014and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks\u2014cleansed and able to lend safely, and hence trusted again by other lenders and investors\u2014could then be sold off. <\/p>\n

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action\u2014exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health\u2014can cure the financial sector as a whole. <\/p>\n<\/blockquote>\n

So why isn\u2019t the administration ensuring that no institution can ever again become too big to fail?<\/p>\n","protected":false},"excerpt":{"rendered":"

I\u2019ve posted on several occasions (example here) on the question of why the Obama administration isn\u2019t talking about regulations that prohibit companies from becoming systemic risks to the the nation\u2019s economy.  We hear a lot about these institutions, which are invariably described as being \u201ctoo big to fail.\u201d  So why aren\u2019t we preventing companies from… Read More<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[106,5],"tags":[],"_links":{"self":[{"href":"http:\/\/griendling.com\/wordpress1\/wp-json\/wp\/v2\/posts\/300"}],"collection":[{"href":"http:\/\/griendling.com\/wordpress1\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/griendling.com\/wordpress1\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/griendling.com\/wordpress1\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/griendling.com\/wordpress1\/wp-json\/wp\/v2\/comments?post=300"}],"version-history":[{"count":0,"href":"http:\/\/griendling.com\/wordpress1\/wp-json\/wp\/v2\/posts\/300\/revisions"}],"wp:attachment":[{"href":"http:\/\/griendling.com\/wordpress1\/wp-json\/wp\/v2\/media?parent=300"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/griendling.com\/wordpress1\/wp-json\/wp\/v2\/categories?post=300"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/griendling.com\/wordpress1\/wp-json\/wp\/v2\/tags?post=300"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}