Thursday, May 7, 2009

Frustration of the bank bears mounts

A column that appeared in yesterday’s Wall Street Journal pretty much summed up the frustration of a group I like to call the “bank bears.” The headline read, “Banks need fewer carrots and more sticks. Insolvent institutions should be taken over by the FDIC.”

It seems that there is a rising sense of frustration among this group because the government is not letting a larger swath of the banking system, that they believe to be insolvent, go under.

The claim that government is not letting bad banks fail is just flat out wrong. Last I checked the FDIC has a public list of about 100 institutions that have so far been closed and the vast majority of those closures happened in 2009. Apparently this fact doesn’t stop the Wall Street Journal from publishing a misleading headline that doesn’t merely suggest, but states outright, that the FDIC is allowing insolvent institutions to continue operating.

One hundred bank failures in the past two years is, I guess, not enough for the bank bears. They want blood and unless they get it, preferably in a big name like Citi or BofA, they are prepared to go on howling about how the government is shielding the banks. This is nothing more than a de-facto nationalization they say, so why don’t the Feds fess up and say it??

What the bank bears should get over is that commercial banks have ALWAYS been agents of the government by virtue of the fact that their deposits are guaranteed by taxpayer dollars and bank assets and capital are all heavily regulated. In addition, banks have lifelines to the Fed. Therefore, by definition they are and always have been, quasi-governmental by nature.

When you hear guys like Glenn Hubbard or other Wall Street financial types (or those with ties to Wall Street) complain about such nonsensical “shielding,” you should think of it as nothing more than a cynical power grab. Once again it is Wall Street (non-bank financial sector) vying for control and dominance over our financial sector.

The fact that they get away with it is a testament to their cleverness: they brilliantly disguise these schemes behind a cynical façade of concern for the economy. The Average Joe, not knowing any better, sides with them even though the Average Joe will be a big loser if these guys succeed in destroying the banking system for their preferred, unregulated-and-everything-goes system of financial intermediation, where a relatively small number of people are rewarded with an inordinately large percentage of national income.

What Average Joe needs to understand is that if anyone should be allowed to fail it is precisely these unregulated non-bank entities that sap brainpower and productivity while injecting nothing of value into the real economy.

In the final analysis the banking system exists for the public purpose. If it didn’t it wouldn’t have its liabilities guaranteed by taxpayer money. Once you understand this the term, “nationalization,” becomes redundant. The bank bears ought to get over it.

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