Motivating the banks the simple way

By Michael Fraase

Sunday, 12 October 2008 11:10AM CDT

Section: Politics

Total borrowingsOn 23 September, US Treasury Secretary Paulson told the US Senate Banking Committee, “Some said we should just stick capital in the banks, take preferred stock in the banks. That’s what you do when you have failure. This is about success.“

On 10 October, Paulson said, “We can use the taxpayer’s money more effectively and efficiently, get more for the taxpayer’s dollar, if we develop a standardized program to buy equity in financial institutions.“

It’s time for Paulson to admit that he hasn’t a clue, has politicized the issue, and to step aside.

If the credit markets have, in fact, seized—and I’m not sure I believe they have—the resolution is straightforward, costs the US taxpayers nothing, but requires a backbone in US agencies and our elected representatives. At 7AM on Monday the US Treasury, Comptroller of the Currency, and Federal Deposit Insurance Corporation (FDIC) jointly announce that one of the core functions of banks is to make good loans. If said banks don’t immediately start making good loans they no longer meet the criteria of being a bank and will have their banking licenses revoked starting at 7AM on Tuesday. Deposits will immediately be seized and auctioned to banks willing to make good loans. Concurrently, the US Congress has to magically grow the appropriate anatomy and immediately reenact the Glass-Steagall Act in its entirety. If there’s something I’ve missed with this scenario, please advise.

Update: Sunday, 12 October 2008 1:20PM CDT: This, of course, has to be coupled with the banks writing down their questionable assets to their true values and the government helping recapitalize them. If the banks don’t revalue these assets—and do it now—as Thomas Friedman says, the market will do it for them.

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