WHAT BANKS OUGHT TO BE FOR.

BANKING CLARITY A MUST TO REPAIR THE ECONOMY.


Stiglitz and Krugman had dinner with Obama. Krugman said he could not talk about it, because it was "off the record".

What should be on the record is this: the banks have a primary function, a secondary function, and a tertiary function. Absent these three functions, it's as if there are no lungs, and no heart: the corpse of capitalism can't walk.

It is not clear that these two functions that define banking philosophically have been insured as much as they should have during the first four months of the Obama administration, while it was busy pursuing further the financial policies of the Bush administration.

Instead a great deal of attention was given to having the bank holding companies make good the very contracts that put in danger the very ability of the banks to conduct these two basic functions.

The three basic functions that should have been attended to are the following.

The first two are primary, and were probably present in inchoating form in prehistory. They are the sanctity of deposit of capital (which is primary), and the clearing of payments (which I view as secondary, considering that payments clear from account to account, and that cannot happen if the accounts are busted). The financial system does not exist without these two functions.

The ability to extend credit is tertiary. Although the economy can work for a few hours without it, many small companies depend upon credit for going from paycheck to paycheck.

Obama had to insure the three functions above. I am not sure about the third function, credit, because I have not seen authoritative studies (banks have been saying they lend plenty whereas professionals in other industries have been claiming the opposite). But for the first two it was easy: just do like the French republic. And do not let banks go bankrupt (Lehman Brothers, a huge, old and famous bank, was allowed to go chapter 11, destroying confidence in the banking system worldwide, a system that rests on trust).

In France Sarkozy decided that all deposits would be insured, in any amount, in any bank. (This can be done in two ways: either by boosting the insurance fund, the FDIC in the USA, or by preventing any banking failure by having the government step in as soon as a bank threatens to become insolvent, the later route being followed in France, so far.)

Insuring any deposit would provide the country with a lot of confidence. Since the currency system is a myriad of contracts in trust, this is crucial, as fundamental a measure to take for the economy as possible. Relative to this, the waste of toxic "assets" is completely irrelevant, just as irrelevant as it should always have been to banking.

Unfortunately Geithner proposed with his PPIP a plan that compromised some more the FDIC (in truth it looks as if the PPIP would bankrupt the FDIC). Geithner's aim was to save the bank holding companies' upper management, and various elements of the plutocracy connected to them, which he seems to view as the essence of the economy.

Instead, the Obama adminstration should have stuck with the TRUST IN DEPOSITS, the basic function of banking, the one prehistoric man understood, but Geithner apparently does not.

Just an example of the sort of difficulty the refusal of insuring all deposits led to: millions of small businesses may only find challenging to maintain balances below $250,000. This is all the more silly, since the Obama administration made clear it viewed the 19 top banks as too big too fail (thus there was no risk insuring all and any deposits; in a huge contradiction, though, depositors did lose their money in smaller banks going in receivership!)



Patrice Ayme
http://patriceayme.wordpress.com/

Addendum: REPAIRING BANKS: Stiglitz called Geithner's PPIP a "robbery of the American people". I agree (and already said this about TARP, calling it Transferring Assets to Rich Plutocrats, as soon as it appeared). But a week later, Obama repelled the mark to market rule, and that pretty much made the PPIP unworkable. The ways of Obama are not as mysterious as those of God: one week he makes a blatant gift to the hedge funds, delivered by his human poodle, and the hedge funds are all happy that the plutocrats are solidly in control, and the week after, Obama takes away their food, but they are too stupid to notice.

Stiglitz and Krugman opposed the conversion of preferred to common stock. Indeed the preferred route for cleaning the banking system would have been receivership (the bank fails, and is reorganized by the government, and then sold for a profit). The point being that the USA then takes ownership of the bank for the cost of recapitalization. The drawback is that severe disruptions to the financial system can happen as shareholders lose everything and bond holders can lose a lot.

The Obama administration had first followed the Bush administration policy (reimbursing losses with taxpayer money, which I have long argued was unworkable: I valued the losses at 8 trillion, minimum; now the IMF is at three trillions in the USA alone). Thus I was satisfied by the conversion into common stock (which has the right of vote, that preferred do not have). It is as good as nationalization can get, once receivership has been excluded (for the reasons of the disruption that bothered Obama).

The Obama administration had first followed the Bush administration policy (reimbursing losses with taxpayer money, which I have long argued was unworkable: I valued the losses at 8 trillion, minimum; now the IMF is at three trillions in the USA alone). Thus I was satisfied by the conversion into common stock (which has the right of vote, that preferred do not have). It is as good as nationalization can get, once receivership has been excluded (for the reasons of the disruption that bothered Obama).