Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Wednesday, February 18, 2009

National Bank Holiday

In 1933, Roosevelt closed all banks for four days in March, and when they reopened they were under new rules and FDIC (federal deposit insurance). It was called a "Bank Holiday" (which is why some Americans get confused at British "bank holidays" that are totally different). This dramatic action largely put a stop to the destabilizing problem of runs on banks.

We are headed the same way. All of our national banks are insolvent. Period. The only reason they do not appear insolvent is that they refuse to "write down" the mortgage-backed securities on their books, meaning they refuse to acknowledge their true value of pennies on the dollar. If they do so, they are insolvent. Piecemeal attempts at putting one big bank or another in receivership will prolong the agony. Amputate the leg and cauterize; do not just keep slicing off another few inches of flesh every couple hours when the gangrene gets too severe.

We need a simple and effective plan: close down BofA, Wells Fargo, Chase, Citigroup - all banks, actually - for a week in March 2009. While they are closed down, replace almost all the senior management and restructure their books, with the taxpayers taking bad assets in exchange for shares in the banks future prosperity. Make sure that the government gets a working majority on the boards of each such bank through its investment. The public needs and deserves to see the executives let go who have failed so badly with their banks. Not let go with golden parachutes; just let go. This, by the way, is the only way to incentivize the next set of bank management not to take irrational risks. They must know that they, personally, will bear some responsibility.

During this Bank Holiday, we must commit all the banks renegotiate all mortgages to reflect ACTUAL current asset value. This can be done. Total residential mortgage indebtedness is around $9 trillion. This tells you what $1 trillion can do. Revamp lending standards at all banks so that they lend not with the reckless abandon of 2000-2008, but with the sensible standards of the 1990s. The current model - some sort of 19th century No Credit to Nobody - must go. Banks cannot behave conservatively (for the first time in a decade) and wait for others to take the risks that the economy will do well. Banks need to take the risks now. Banks also need to restructure credit lines to companies that are struggling rather than turn them off. Again, the banks - backed by the US govt - need to put money out there and take the gamble that the economy will recover. That behavior is the only way the economy will recover.

(As an aside, my family bought a new car this weekend thanks to good deals and the Stimulus package giving an above-the-line dedux for sales tax. This is how we do it, people: we don't retrench, we get out there and continue economic activity).

This is what we need. We need to declare 2009 a Year Zero for finance. The sooner we do this, the sooner we can begin a recovery.


Dr. Strangelove said...

I admire the boldness of the proposal, LTG. Even Alan Greenspan said this week that temporarily nationalizing banks may be necessary, although he insisted it was only the sort of thing one must do, "once in a hundred years."

From a financial point of view, I don't think asking banks to renegotiate their remaining good mortgages makes sense. But from an economic stimulus point of view, it is brilliant. And of course, as a mortgage owner who bought at the height of the market and is also paying much more interest than the going rate, any refinancing would free up lots of dollars for me to spend, spend, spend. And as a yuppie, I certainly will spend :-)

Raised By Republicans said...

What kind of car did you guys get? And did you finally get rid of that old gas guzzler SUV?


USwest said...

I'm all for cleaning house. Trying to cajole these people into doing what they ought to doesn't work. Anyone one who sends the money off shore to "protect it" should be punished with fines and prision time.

Will the tax credit for the car cover your insurance and registration?

Pombat said...

LTG: certainly a strong plan, but what are you going to do for the people who didn't buy houses at the top of the market because they couldn't, and decided to be sensible instead (thus not contributing to all this) - do they all get given houses now?

Dr. Strangelove said...

Leaving aside the thorny question of whether buying real estate two years ago was "sensible" or not, Pombat asks an important question regarding the sorts of rescue packages under discussion these days (like Obama's recently announced $275 billion effort): where is the consideration for everyone else? By "everyone else" we mean of course those who are renting.

I think the answer actually is rather in line with Pombat's humorous suggestion that they "all get given houses now." That is, we should make it easier for (qualified) people to get a mortgage. Most of that job has already been done by the market, actually. The lower interest rates and lower home prices are a huge incentive for new homeownership! It's not a free house but it's certainly a lot more house for your money--and I think the government will now actively oversee banks to prod them to lend enough money to meet the demand.

The Law Talking Guy said...

Renters are benefitting a great deal from a very cheap rental market now. They are, in other words, among the winners from a surplus of properties of declining values, while home owners are the losers. I spoke to a landlord client of mine last week who said he was slashing rents by $300 and $400 a month to keep tenants. And on commercial properties, even greater reductions.

Renters who wish to buy are also benefitting from cheaper housing prices. The LA Times reported this morning that average home prices are now at 2002 levels, nearly 40% statewide (very broad average, of course - some markets collapsed, others down less).

So, Pombat, in a real sense, renters are being "given" houses now - or so it must feel to the current homeowners who are foreclosed upon and watch someone else buy their house for half what they paid for it.

The Law Talking Guy said...

FYI, I would be unlikely to benefit in the short term under the plans I described.

USwest said...

I think my market is still way overpriced. A bank owned "condo" of 600 Sq. Feet is going to $210K. It's isn't worth more than $80K. So while prices are coming down, they is still a way to go.

Also, residential rents in my area are going up, not down. All those homeless former homeowners have to live somewhere.

Commercial rents vary. I have one friend who got his rent slashed in half. His landlord would prefer to have his business occupy the place than have it vancant.

Another friend rents a small shop in s touristy town that is quickly becoming a ghost town is expecting a 30% increase. So the landlords in that town seem to be slow to get the message.

Anonymous said...

We got a Nissan Altima. It's pretty awesome. Good gas mileage, lots of automatic stuff (big news for someone who had roll-down windows, manual door locks and a tape deck for the better part of a decade) and a handy car-seat-installation system. And it actually accelerates when you push down on the gas pedal!

I know some people will probably crab about the fact that it's not a hybrid, but considering the premium one must pay to purchase one (there are no deals on those babies), it takes quite a long time to recoup the initial outlay.

And in case anyone is interested, here's why we didn't buy an American car. I already own one. The engine blew up at 70,000 miles (6 car payments before I owned it outright) and the repair bills came along at a pretty good clip once the 3-year warranty expired.

-Seventh Sister

The Law Talking Guy said...

USWEst, that's interesting about rents there. I know that in LA they are going down. I suspect that they will go down sooner or later, precisely because of all this. Another friend of mine just bought a condo in LA for significantly less than its peak 2006 price.

But yes, it is true that rental markets do not "clear" as quickly as other markets do, because of the existence of one-year and multi-year leases.

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