Friday, February 6, 2009

Let's Start New Banks

Paul Romer, a highly regarded economist, supports letting the bad banks go, and the sooner the better.
Let's Start Brand New Banks
A clean slate would keep TARP money away from bad banks.


Everyone agrees that the United States urgently needs a few good banks. Turning bad banks into good banks is a difficult and risky way to get them. It's simpler and safer to start entirely new banks. Click here for the full article.

I have just a couple of ideas to offer in support of Romer's common sense recommendations. We already have any number of good banks that didn't make the poor decisions the bad banks made. All we really need to do is get the bad banks out of the way so the good banks can grow by buying up the good assets from the bad banks at auction. We already have elaborate procedures for FDIC taking over the assets of bad banks. Why aren't we using the process already in place?

Letting bad banks go bankrupt properly chastens the poor decision making that made the bank bad. It also properly rewards existing good banks, as they will grow their business and acquire market share.

Why does the federal government need to be involved at all, except to enforce laws and procedures already on the books? There is no shortage of private equity capital available to finance growth of existing good banks. What is in short supply is regulatory stability and ability to see a believable future. The uncertainty is caused by guess who---that's right, the federal government and the Fed.

Our society and economy certainly doesn't need a federal ownership stake in banks. Romer's notion that federal ownership would be a temporary bridge is quite idealistic. Once the federal government is in, it would be almost impossible to get them back out. And once the bureaucrats and politicians have an ownership stake, they will insist on running the show. Witness Obama's injunction about executive pay in recent days. Witness the "oversight" politicians are clamoring for with the bailout money advanced to the little three auto makers.

How often do we need to be reminded that voluntary exchange and private enterprise are the history-proven engines of human prosperity and welfare? It is hubris to think that 545 people (the federal government)---especially when aided by their bureaucratic minions---can know enough or do enough to manage a $14 trillion economy inhabited by 135 million households. That would be true even if the politicians and their bureaucrats were benevolent dictators instead of just being ordinary humans pursuing their own best interests.

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