Jim,
Here's another idea for a plan: Start up some new banks.
This would require only a limited amount of startup capital from the government and/or private investors. New banks, starting with a clean balance sheet, would attract deposits away from existing banks, and they could begin lending money out in a rational way without having to carry a backlog of bad loans.
Usually old institutions have to fail before new ones are set up in their place, but maybe we have an opportunity here, if the government really wants to do something constructive, to set up new healthy banks before the old ones go under, just like the way Buffet created a new healthy bond insurer to replace Ambac and MBIA. However I haven't heard any such thing proposed.
The problem with existing proposals is they are trying to carry existing bad loans in order to save existing financial institutions and prevent recession. But these are exactly the things we need to stop doing!
A recession is the only way to wipe out bad debts, and that is why recession is an inevitable and essential part of the business cycle. The system has been struggling for the past decade to service an ever-growing load of bad debts that are too big to be paid off. Transferring debts from the private sector to government is exactly the wrong thing to do because private companies can default on debt; the government can't, it has to carry it forever (or until it's paid off, which it never is). All the excesses of the past decade are ultimately due to an attempt to avoid recession and the loan defaults that go with it, but it is obviously not working. Yes, we could postpone the inevitable by another few months with another massive government bailout, but at what price in the long run? Let's get it over with. The system needs a reset.
Fun-da-Mental |
