Another Day Another Dollar

Here is a good article on what is wrong with the current government plans. Basically boils down to what a lot of people are saying in terms of too few, misdirected funds and not enough of a concrete plan. This article provides more detail and provides a nice discussion on why the models the government relies upon are not accurate as they are built on assumptions that are simply not valid. In other words, you can not properly plan for a once in 50-100 year economic event based on models calibrated to a once in 25 year economic event. Time to throw out the old book and start over.

http://www.washingtonmonthly.com/features/2009/0903.galbraith.html#Byline

Another key point to the piece is that the models are assuming we return to where we were before the recession, a/k/a normal. Yet that "normal" was far from it. It was - as they said in Young Frankenstein - Abby Normal. We are not going back there or anywhere close.

Another key point to the article worth noting is the attitude of financial institutions being saved. They may very well be rolling the dice. If you leave current management in place, which we are doing, they may feel they have nothing to lose. They can make a big bet on commodities or equities and let the dice roll. If they are right, the government support is perhaps not needed and all is well in corporate America, and if they are wrong, then the government is already bailing them out so so what. This is the moral hazard our government has sponsored and, frankly, if I were these corporate CEOs I would likely think like them. Go for broke as you have insurance if you fail.

One negative aspect of this attitude is that there is little to no money to be made in usual bank functions. You can do a loan but there are few companies worth lending to and even fewer individuals, so why bother when we can use the government money to make a big bet on commodities or the like. No wonder that credit is gone. Yes there are plenty of other reasons - logical reasons - why credit is dried up, but government support is one reason for it.

Another Two Down

Hardly a surprise here - two more banks down. That makes 20 for the year. I went to the FDIC site around 4:00 and they had not posted yet, but I apparently just got there too soon. A bank failure or two every Friday is to be expected in these times. Indeed, the number of banks each Friday could well increase as this year continues.

http://www.calculatedriskblog.com/2009/03/bf-19-20-fdic-seizes-teambank-national.html

The FDIC is one organization that saw the severity of this mess early on and I think they are more-or-less prepared to handle it. That is, of course, assuming the government does not allow some of the big boys to fail. Some are likely already insolvent and legally the FDIC should be taking them down, but for political reasons this is not being done. Big boys aside, the FDIC is pretty well prepared for this mess (not economically, but logistically). They began hiring big time early last year, bringing back people from retirement and getting ready for the onslaught. They are now working on getting the funding they need to handle this mess. The FDIC is ready. I only wish we could use this well run agency to deal with some of the larger institutions that are in trouble.

Not Just the FDIC

The FDIC is busy, but now the National Credit Union Association ("NCUA") is getting busy as well. Two credit unions down today as well. To be expected.

http://www.calculatedriskblog.com/2009/03/regulators-seize-two-large-credit.html

Worth noting here that these were corporate credit unions, not retail establishments dealing with consumers, but the fact remains times are tough.

Tears for Credit Card Companies - NOT!!

Back in 2005 credit card companies lobbied hard for some rather significant changes in bankruptcy laws that made it harder for those going bankrupt to extinguish their credit card debt, and they got what they wanted. In an ironic twist of fate, this victory led these companies to extend credit to borrows they might otherwise have avoided. Remember those daily mailings offering a credit card or balance transfer. I have not gotten one in a while and am thankful for it. Any hoot, the credit card companies have made their bed. I might add that part of their problem was the fact that people were tapping in left-and-right to home equity loans for credit, instead of credit cards, so credit card companies were in a pinch for business. Be careful what you wish for.

Disclosures: None