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.