"Most of the big banks need to be put into some form of bankruptcy and recapitalized, and I think everybody understands that." Ken Rogoff
The major US money center banks will be nationalized. The only questions are when and how.
When is difficult. Rumours abound. A common rumour is for a bank holiday sometime around the President's day holiday in the US on February 16, or later in February.
This may be too early, but no matter. It is coming.
Its the how that is more interesting in terms of meaningful speculation and the impact on any intended recovery.
How will we nationalize the banks? How far will nationalization have to go?
With regard to nationalization the bank toadies and spin doctors say things like "Would you want the government running the banks?" Well, we think this is the usual deceptive rhetoric we get these days instead of serious discussion and hard news.
In a nationalization it is highly unlikely that the government will want to 'run the banks,' although it is hard to see how they could do a job that would be much worse than the overpaid princes of Wall Street who now stand exposed as having ruined the national economy through incredible dereliction of any standard of sound and responsible management.
Rather, there is a range the process which will be called nationalization.
If we hold the current course at some point the government will place enough capital and hold enough preferred stock in the banks to effectively own them, but passively. The problem with that is the mismanagement and losses will continue to deepen, and the government (public) will own the acid core of thirty years of white collar crime, burning a hole in the fabric of the national economy and monetary system.It will be a financial Vietnam, with Larry Summers playing Robert McNamara and Obama as LBJ. It will be a cascade of corruption and deception and will tear the country apart.
At the other end of the nationalization spectrum, he government will 'take over' the bad banks as they did in the S&L crisis, and restructure them.
There are between five to ten banks in the country that are hopelessly insolvent through mismanagement bordering on fraud. At the moment they are sucking up capital at a ferocious rate through bailouts, and crowding out constructive uses of capital.
They cannot precipitously fail, but they can and should be taken into receivership by the FDIC, their books opened, their assets sold, debts written off, and the remains either buried peacefully or allowed to emerge as new banks with different management if there is enough left to make it respectable.Who will lend? The regional banks. They are the bulwark of the banking system. It is in the money center banks where the contagion continually spawns.
To attempt to maintain the status quo is no longer possible, no matter how much money and influence and political power that the ten Wall Street banks may wield in Washington.
The shareholders will be effectively zeroed out as they should, the bondholders handed a steep haircut on the order of 40%, the creditors paid 70 cents on the dollar, if that.
Credit default swaps and other bets will be dealt with harshly. If a bank has a heavy interaction with a money center bank in Credit Default Swaps or other 'weapons of mass destruction' to the point where it places it insolvent guess what, it can join the restructuring club.
The depositors will be, MUST be, kept whole, to almost 100% on all private non-corporate deposits. Pensions must be kept whole above and beyond the limits of the Pension Benefit Guaranty Corporation.If the Congress, and this Administration, continued to bend the fate of this country to the bankers of Wall Street there will come a time when the people will simply say 'enough.' Of this we no longer have any doubt. And the pain from that will be much greater than the short term pain we will receive in restructuring the system now.
And it will be painful. But necessary. We do not have a cold. We do not have the flu or the sniffles, a temporary setback. We have a serious gangrenous infection that must be dealt with before it takes down the body politic.
We can choose to linger, to waste away in our corruption as Japan has done. But we do not think that the US public will accept the chains of servitude gracefully. They are too heavily equipped with options, thanks to the foresight of the founding fathers.
If this seems to harsh, too black and white, too unthinkable, here is a recent interview from Ken Rogoff with BBC Hardtalk to help punctuate the seriousness of the situation.
The simple truth is we no longer have any choice, any options. We elected the Obama Administration to reform Washington and the economic and political system in this country.
Ok guys. Reform.
The deeper we go down this rabbit hole the more difficult it will be to return to the light of day.
You may wish to take the time to listen to Ken Rogoff in this BBC interview on Hardtalk. Mr. Rogoff is a noted economist who is completing an intense study of financial crises.
We obviously do not agree with everything Ken Rogoff says. That would be improbable.
He starts from the assumption that we have free trade in the world today and should maintain it, whereas we believe that free trade went out the window with the devaluation and pegging of the Chinese renminbi in the 1990's, if not before that with aggressive Asian mercantilism supported by US multinationals and Wal-Mart.
But other than that, it sounds like the standard fare served at Le Café Américain for the past two years at least, and it is a happy and humbling experience to see someone express similar ideas with such gravitas.
It is clearly stated, it is well thought, and it is absolutely essential. It is what a substantive news program looks and sounds like. We rarely get anything like it except on the Web and on Public Television.
Rogoff on BBC HardTalk
