Nobel prize winning economist Joe Stiglitz has an important article in the Nation arguing for “A Bank Bailout That Works.” Unfortunately, it won’t be read by many people because it’s in The Nation and it’s thousands of words long.
That’s where we come in. We went ahead and read the entire thing so you don’t have to. Here are the six things you need to know from Stiglitz’s piece. Feel free to pretend you read it. We won’t tell.
- Solvency, not liquidity. This is not a liquidity crisis. It’s a solvency crisis. Many of America’s largest financial institutions have finally put the bank back into bankruptcy.
- TARP sucks. The TARP was a dismal failure. It was extremely expensive and didn’t fix the credit markets. It encouraged banks to consolidate, making the too big to fail problem even worse.
- Forget the Bad Bank. The Bad Bank is also a terrible idea. No amount of financial alchemy will allow the government to make money from bad assets. Even if we buy junk at inflated prices banks might still be broke. Bankers like it, though, because it is a less transparent way of recapitalizing them.
- Drop the Insurance Idea. Insuring assets won’t work either. Politicians like this because they hope to be out of office when the bills come due. It creates a negative sum world where increased taxpayer losses are greater than Wall Street’s gains, and discourages banks from working with mortgage borrowers to avoid losses.
- Public private partnerships won’t work either. The private-public partnership idea is a scam. Given the high cost of private capital, no one will invest in junk assets even if there is no downside. Instead, they’ll demand a guaranteed upside. Banks like this choice and so do hedge funds because it is so complex and nontransparent they figure no one will notice the taxpayers are being fleeced until it is too late.
- We have enough bad banks. Let’s start a good one. Stiglitz’s innovative solution is to have the government create a Good Bank that would take all the good assets (anything that is easily priced) of any bank that fails capital adequacy stress-tests. The depositors at the old bank would be insured. Whether there is anything left over for shareholders and bond holders would depend on how well the bank managed the disposal of the bad assets.
Would this work? We’re reserving judgment. But it is nice to finally have a new idea out there.