Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Central Banks May Ramp Up Gold Buying - 18th Apr 21
How to Get Rid of Driveway Weeds With Just WATER! 6 Months later NO Weeds, Ultimate Killer! - 18th Apr 21
State of the European Markets - DAX, FTSE, CAC, AEX, SMI, IBEX 35, S&P/MIB, Euro Stoxx 50, RTS - 18th Apr 21
Einvestment Fund: What You Need To Know About Investments - 18th Apr 21
Google Alphabet (GOOG) AI Deep Mind Stock Trend Analysis - 17th Apr 21
Stocks and Bonds Inflationary Slingshot - 17th Apr 21
Best Smartphone Selfie Stick Tripod Review by ATUMTEK Works with Samsung Galaxy and Iphone - 17th Apr 21
How to Give Budgie's First Bath | Easy Budgie Bathing and Water Training with Lettuce - 17th Apr 21
Record-breaking Decrease in New Passenger Vehicle Sale in Europe - 17th Apr 21
US Stocks Climb A “Wall Of Worry” To New Highs - 16th Apr 21
Gold’s Singular Role - 16th Apr 21
See what Anatomy of a Bursting Market Bubble looks like - 16th Apr 21
Many Stock Market Sectors Are Primed For Another Breakout Rally – Are You? - 16th Apr 21
What Skyrocketing US Home Prices Say About Inflation - 16th Apr 21
Still a Bullish Fever in Stocks? - 16th Apr 21
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21
The History of Bitcoin Hard Forks - 10th Apr 21
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Why the Bank Bailouts are Not Working

Politics / Credit Crisis Bailouts Feb 12, 2009 - 05:46 AM GMT

By: MoneyWeek


Best Financial Markets Analysis Article800bn, 1trn, 2trn – just think of a number. Then double it. That seems to be the approach behind the latest batch of bail-outs.

To 'save' their economy, America 's politicians are churning out even more 'rescue' packages. All with more noughts attached. Now they've just "placed an eye-watering $2.3trn price tag on bailing out the US banking system", says The Independent's Stephen Foley , opening up "a second front in the battle to pull the country out of recession".

Hmm. History's taught us what happens when you open up a second front in a battle before you've won the first – you tend to lose the war.

There is a better way to fix the banking system – the 'free market' may yet have the answer, and without taxpayers having to pick up the bill. We'll get to that in a moment – but first, what's this latest bail-out package all about?

The problems with America 's latest bail-out plans

For the politicians, bashing bankers' big bonuses is the easy bit. But the sums involved are absolute peanuts compared with those needed to sort out the whole banking mess. And headline-grabbing sound bites don't keep financial markets happy for long.

So the acid test had to follow. America 's lawmakers really did have to sound as if they knew how they were going to get us out of this mess.

And on Wednesday, US Treasury Secretary Tim Geithner gave it his best shot: "The battle for recovery must be fought on two fronts: jump-starting job creation and private investment, and getting credit flowing again to businesses and families". He wants to inject more government money into some of America's biggest financial firms, set up a public-private partnership to buy up to $1trn of banks' bad assets - loans where lenders won't get much of their money back – and start a $1trn credit facility to push lending to consumers and businesses.

But then he made his first big mistake. He said he needed more time to work out the full details "so we don't put ourselves in the position again" of "quick departures and changes in strategy". Then he "ducked the tough questions investors want answered" about the latest shore-up scheme, says Bloomberg's Rich Miller .

In other words, trotting out his plans with a $2.3trn price tag – money that the US government doesn't have, so would have to get from taxes, borrowing or printing - just didn't cut the mustard. "He should have waited until he had his ducks in order", said Stone & McCarthy's Ward McCarthy. "The lack of detail leaves too much confusion, misinterpretation and speculation."

So the Dow dropped 4.6%, with bank shares hit by double-digit plunges. And although US shares nudged up a little yesterday as the previous 'stimulus package' passed muster with Congress, the big questions remain.

Can banks saddled with oodles of toxic assets really be saved?

If not, will they be nationalised?

And how big a bill will taxpayers have to pick up?

Because if all the dodgy loans on bank balance sheets are priced at what they're really worth, those banks will go bust. But if the banks get paid more for this rubbish than its 'true' value, taxpayers take a bath.

Why tax payers are right to be sceptical

And taxpayers are right to be sceptical. After all, if you set politicians loose with unlimited sums of money, you're just asking for trouble. The US Treasury has just admitted to "overpaying" $78bn for stakes in troubled banks as part of the $700bn TARP – Trouble Asset Relief Programme – bailout set up by Hank Paulson.

In short, vast chunks of taxpayers' dollars have just been wasted. Yet despite lawsuits from news services Bloomberg and Fox, there's been continued stonewalling on where the stuff actually went – the government clearly feels that in an "emergency" situation it doesn't need to be accountable for its actions. And all the while, US government borrowing is soaring.

Will we do a better job in Britain ? Given that we're following roughly the same path as the Americans, almost certainly not.

How to save the markets without costing the taxpayer

So is there another solution, that doesn't involve state guarantees, bad banks or nationalisation?

University of California Professor Roger Farmer reckons so. "We just need faith in free markets and a little creative intervention", he tells FT Alphaville.

You can read the whole piece here: How to fix the banks , but here's a rough summary of how his idea works. You create a fund of bank shares which investors can buy and sell. And the key is that the fund is backed, and the fund's price regularly guaranteed, by a country's central bank – like the Fed or the Bank of England.

Investors would be encouraged to buy the individual bank shares in the index to cash in on the central bank's backing. As bank shares are bought, prices rise until their collective worth equals the underwritten fund value.

What does all this mean in English? Well, in a nut shell, the central bank stands behind the banking sector as a whole with a chunk of money, but it's then left up to private investors to decide how this cash is split between the banks.

So the market sorts the wheat from the chaff. Any bank with a high proportion of toxic assets will lose capital to better-run lenders. And so new, well managed banks would attract capital, while old ones would fall in value, or fail.

Would it work? It would need some 'out of the box' thinking. Further, it certainly wouldn't be without pain, because some banks would inevitably go bust. But it takes the politicians out of the game. And here's the bit I really like. "This scheme could recapitalise the banking system at little or no cost to the taxpayer", says Professor Farmer.

That's the best notion I've heard in a very long time.

By David Stevenson for Money Morning , the free daily investment email from MoneyWeek magazine .

© 2009 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Money Week Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules