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.

WSJ 1-6-09 By PAUL ROMER

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.

An Interview with Robert Barro

This link will take you to an interesting interview with Robert Barro. He's a respected economist who actually works on the macroeconomic stuff he writes about.

Bad Banks vs Good Banks

Couldn't have said it better.

“Free markets work well to flush out underperformers, giving soundly managed companies the opportunity to step up and fill the void. Government bailouts merely prolong the agony.”

— Wayne Silzel, responding to WSJ article "Business World: Obama's Dangerous Bank Bailout."

I would add that bailing out the bad banks also punishes the good banks. It really isn't the case that all the banks made bonehead decisions.

Stimulate What?

One thing is abundantly clear. The stimulus bill will certainly stimulate the federal government. Looks like any number of new jobs will be available in federal bureaucracies.

"Check your PC's virus program, then pull down the nearly 700 pages of the American Recovery and Reinvestment Act. Dive into its dank waters and what is most striking is how much "stimulus" money is being spent on the government's own infrastructure. This bill isn't economic stimulus. It's self-stimulus."

One wonders how well folks laid off over the past few months will fit into the D.C. scene.

According to Michael Hirsh writing in Newsweek,

Even so, Obama has allowed Congress to grow embroiled in nitpicking over efficiency when the central debate should be about whether the package is big enough. When you are dealing with a stimulus of this size, there are going to be wasteful expenditures and boondoggles. There's no way anyone can spend $800 to $900 billion quickly without waste and boondoggles. It comes with the Keynesian territory. This is an emergency; the normal rules do not apply.

That's doubtlessly true for any "one." But it's not true for all of us. Taxpayers could and would find any number of great ways to spend $800 to $900 billion quickly without waste and boondoggles. If Congress and Obama really want to stimulate the economy, cut payroll taxes for a period long enough to finance the stimulus total. I promise that I'll spend my share. How about you?

Trade War?

Another respected economist, Burton Malkiel, weighs in on the ill-advised provision of the stimulus bill that requires domestic steel be used in construction projects.

Accounting Standards Reform

Mark-to-market accounting has its advocates and detractors. Some say MTM accounting is at the core of our financial crisis. Others disagree.

Here's a question; why can't we have both traditional balance sheets and MTM balance sheets side by side? I vote for full disclosure. Why does it have to be one or the other?

Summary of the Stimulus Bill

Click here for a summary of the American Recovery and Reinvestment Act of 2009 (special nod to George Orwell a.k.a., Eric Arthur Blair).

Does anyone really believe that this gargantuan increase in federal spending is the path to economic prosperity? Here's the bad news; this is just the beginning of a massive transfer of resources from the private sector to Washington.

"TANSTAAFL" Lovers of liberty know what this means. Members of Congress evidently do not. That doesn't necessarily mean Members of Congress are not lovers of liberty, but it does raise the question.

Make no mistake; as Congress and the Obama administration command a larger share of national income, the fortunes of private enterprise will decline. Economic theory and economic history are exceptionally clear about the inevitable outcome.

If you agree with me that voluntary exchange and private enterprise are the engines of economic prosperity and human liberty, click here to send a message to Congress.

Time for Import Restrictions?

Nobel Laureate Gary Becker reminds us that the benefits of trade don't go away during a recession. Getting back to a healthy, growing economy as quickly as possible will depend on trade (voluntary exchange) with the rest of the world.

While it's certainly true that higher tariffs on imported steel will benefit the domestic steel industry, it's also true that the rest of us will bear the cost of that benefit. We will bear the costs in the form of more expensive infrastructure projects. We will also bear the costs through reduced exports of what we produce domestically.

Focused benefits with dispersed costs is the order of the day in the stimulus bill. Gary Becker explains it, yet again.

Buy American Once Again-Becker

Every recession, including those milder than the current recession, leads to pressure to reduce spending on foreign goods by raising tariffs and other import restrictions. The avowed goal is to help domestic workers and businesses that are going through difficult times. Hostility to imports when unemployment is high and rising is surely understandable. Nevertheless, it is unwise to engage in seriously restrictive international trade policies even during a serious recession.

Unfortunately, in the recent stimulus bill passed by the Democratic members of the House of Representatives, the recession is used as an excuse to promote "buy American" policies. The bill would, among other similar restrictions, ban the use of non-American steel in the many construction projects that are part of the stimulus package. This provision was included even though it appears to violate US obligations under the rules of the World Trade Organization, and under the Nafta agreement with Canada and Mexico. This buy American provision in the stimulus bill has already led to retaliatory threats by several European and Asian countries since many other countries are also eager to place greater restrictions on imports. Click here for the full article

Why Some People Favor Higher Taxes

I guess it’s no big deal to favor higher taxes if you don’t intend to pay them yourself.

Performance Czar Killefer Withdraws Candidacy

Ms. Killefer, 55 years old, failed to pay employment taxes on household help for a year and a half, the Associated Press reported. In 2005, the AP said, the District of Columbia filed a $946.69 tax lien on her home for failure to pay the unemployment compensation tax. The error was resolved five months later.

Ms. Killefer is the third Obama nominee to confront tax problems. Treasury Secretary Timothy Geithner was confirmed despite disclosure about his failure to pay certain taxes. Tom Daschle, Obama's pick for Health and Human Services, is under scrutiny for his delinquent payment of some $140,000 in taxes and interest.

NEWS ALERT

from The Wall Street Journal

Feb. 3, 2009

Citigroup is exploring the possibility of backing out of a nearly $400 million marketing deal with the New York Mets, say people familiar with the matter. Officials at Citigroup have made no final decision about whether to try to void the 20-year agreement, which includes naming the Mets' new baseball stadium after the bank, say these people. In a statement Monday, Citigroup said that "no TARP capital will be used" for the stadium -- referring to government funds from the Troubled Asset Relief Program. But as it revisits the pact, Citigroup is essentially acknowledging that the volatile political climate could make it untenable for the bank to proceed with the deal.

The camel’s nose is in the tent. The TARP and whatever turns out to be Son of TARP have put our feet on “the road to serfdom.” This is how it begins. This slope isn’t just slippery; it’s a near vertical sheet of ice.

Incidentally, since money is fungible, TARP capital will certainly be used for any and all expenditures made by Citigroup, including the Met’s stadium deal.