I've gotten two new pebbles for my economic slingshot. One is a big fat dictionary of terms, the other is the biography of Warren Buffett, The Snowball. So much to learn. Frugality is the new black.
Today's lesson has to do with the example of Japan. But first, what Bernanke has done is to emerge as the man with the last theory standing. His theory about what went wrong in the Great Depression is that the big banks were allowed to fail. This is apparently the wall that Bernanke is making against the storm of chaos we are facing - these banks will not fail.
But now that they have been reanimated, will they become zombies? Therein lies the danger, given the example of Japan whose banks were supported long enough to stay alive but not well enough to make the kinds of business decisions that are healthy for the economy. And so while the original idea of TARP, to buy off toxic assets, has turned out to be a dead idea within a week, what are we going to be thinking next week. As it stands, Bernanke's 250B into 9 top banks has been spent not on the bottom but the most preferred assets. So what encourages the bankers to do their best when the preferred stock is going to pay dividends not retained earnings? Basically if the top dogs at Citi would have gotten x% of a bonus pool from a 10% net profit in the old days and now a fraction of that net now goes directly to the new government shareholder, what's the point? Who knows what punitive taxes an Obama administration will tack on to that to satisfy the primal urges of the torch and pitchfork populists?
Moreover, what is the exit strategy? OK we agree with Brad DeLong that when it comes to central banking, everybody is a socialist. But how do we ultimately get government out of banking and everybody else and everything else they rescue?
Imagine this 250B works. Liquidity crisis over. Then what? What about that commercial paper market? What about the insolvency of everything else the Feds have taken a piece of? What's the fair market values for stuff the government owns, and who decides when the Feds take an L? I mean can you imagine some group of investors, you know, some multibillion dollar consortium wants to buy back all of the government stake in JPMorgan. But instead of some profit on the 10Billion share, they want to pay 8Billion. Who in government decides that's OK? What Critter is going to say OK, the taxpayer is stuck with the 2Billion net loss on the government investment, especially if we're in (when we're in) a deficit situation?
Yeah. Scary huh? Meantime? Zombie bank, not responsive to the real market. How do you turn a zombie back into a human again? That one's eating at my brain.
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