What About the Banks?

I do not like Paul Krugman. The economic theories and systems he supports are the foil of my own. His column yesterday in the Times warned of moral hazard created by government policies aimed to shore up the toxic assets. It surprised me, after all he is the one of the Champions of the Keynesian Multiplier and the Stimulus package.

"Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued."

Sounds like moral hazard to me. Who would have thought?

I find it interesting that we have a stimulus bill that has been passed by the Congress, and a massive Budget will be passed soon. But there is no plan for the banks. The Treasury Secretary Geithner has not provided any solution. There was talk about a plan that emulates the Swedish solution with a bad bank. I don't believe that using Sweden as a model is the right solution. After all, the Swedish economy is equivalent to the state of Ohio.

What is clear is that there has been no progress in solving the problems in the banking sector. The longer we sit idle, the more we will be looking at a "lost decade". There has been no leadership from both the private and public sector. The populist sediment that has arisen against bankers has hurt the prospects of leadership from the private sector. But this is what I believe is missing in the current crisis, and what will help cure the credit anorexia. In the panic of 1907, many of the factors were the same. J.P. Morgan literally locked all of the bank and trust leaders in his library until they found a solution. Where is our J.P. Morgan in this crisis? Is he too scared to step forward?

Is it wrong to let some of these banks fail? Or could we start selling off assets in these companies? AIG and Citi for instance have many profitable divisions that could be sold off. Is the mantra, "too big to fail" going to be the theme of the "Great Deleveraging". The readers of the Freakonomics voted it as the new six word motto for the United States.