Recent news stories and blog postings have reported on the continued hemorrhaging of red ink at US financial institutions, despite the presence of the $700 billion Troubled Assets Relief Program (TARP). I have had my own misgivings about how the TARP has been implemented and said so in two postings, “Secretary Paulson, Please Change Your Mind Again” and the more recent “Update on ‘Secretary Paulson, Please Change Your Mind Again.’”
Now comes word that the losses at a number of financial institutions are so bad that the Obama Administration is seriously considering the nationalization of the banking system. Nationalization!!! This means the takeover and operation of formerly private firms by the government. This possibility is galling because, first of all, the TARP was supposed to provide enough monetary support to get financial institutions to recover and start lending again, and secondly, it opens the American taxpayer to a greater exposure to financial losses than was under the original plan of purchasing the problem assets with the TARP funds. In addition, there is no telling if hired bureaucrats can run a financial institution any better than its former managers, although it must be admitted that the bureaucrats perhaps can’t do any worse either.
Nevertheless, with over 8,000 banks in the US, there are too many banks in operation just as there currently are too many retailers. Just as many retailers are restructuring and some are going out of business, the banking industry needs to become rationalized, not nationalized. Even after rationalization, there will be thousands of banks with tens of thousands of branch offices available for depositors and borrowers. And we should not be concerned about the so-called “too big to fail” doctrine in which some banking organizations are so large that their failure will cause wide-spread panic and dislocations in the global financial system. First, a great deal of panic and dislocation in the financial system has already occurred that has gotten our attention of how bad the situation can get and has gotten the authorities to make plans to save what remains of the banking system, and second, those large financial institutions have become smaller on their own as a result of the losses incurred and their efforts to save themselves by downsizing. These “too big to fail” banks are not as big as they once were.
Yet people who have deposits with these institutions do have a great concern about whether or not there is enough deposit insurance to recover from large bank failures. It is here where the Obama Administration and the Congress can do something constructive to reassure depositors. Instead of another bailout fund for businesses, the Congress can authorize tens of billions of dollars to ensure the solvency of the Federal Deposit Insurance Corporation (FDIC) in case the failure of some large banks should deplete the deposit insurance fund. Any deficit in the insurance fund can be made up in the future and the US Treasury paid back by collections of deposit insurance from the surviving banks over time. Furthermore, the obligations owed to the failed banks can be reassigned to the survivors as part of the industry restructuring by federal banking regulators so that banking relationships can be maintained and disruptions kept to a minimum.
This continued deluge of losses and mismanagement in the financial sector cannot be maintained indefinitely. The fact that the government is seriously considering the nationalization of the banking industry should be considered a wake-up call to finally cut at least some of the losses that this sector has imposed on US society. There are far too many banks for the US economy to support. Just let some of those banks die.
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