OUR BLOG

Featuring marketing tips, tech news, digital wonders, some personal things and everything in between . . .

Read more

Obama & The Dilemma With The Banks


Wednesday January 21, 2009

blog image
Reading Time: 4 minutes

President Obama and his advisors face some tough decisions regarding the banks.

Paul Krugman writes for the New York Times, teaches economics at Princeton, and won a Nobel Prize. He may be too liberal for some but he lies out the problem pretty well in this Op Ed piece on the NY Times.

Lets say we have a bank with assets of $2 trillion and liabilities of $1.9 trillion. So its net worth is $100 billion. However suppose that $400 billion is overprices – mortgage backed securities and other junk They may be only worth $200 billion. So the bank has really gone bust. It may still be open and its stock may have some value, but the value is based on the hope or expectation of a government bail out.

The government needs to bail the bank out because of its importance to the national and global financial system. The government let Lehman collapse, financial markets froze, and the world financial system nearly collapsed. So the government wants to avoid a repeat.

The government could just give the bank money, say $200 billion. However that would be a giant gift and would probably encourage more irresponsible risk taking in the future.

Another idea would be to do now what was done in the 80s with the Savings and Loans. The government took over the S and Ls, moved the bad assets to the newly created Resolution Trust Corporation, made the S and Ls solvent, then sold them.

Doing this with the banks will look like the government is nationalizing the banks. So a third idea is a variation and it appears to be the most likely. The government will move the bad assets from the private banks to a new government bank. The government will pay “fair value” for the bad assets.

While this approach looks good, its not a gift because the government is getting something in return and it not nationalizing the banks. However, how do you price the bad assets. Probably at more than they are worth. The price must be high enough to keep the banks solvent for one thing. For another, if the price was not too high then the banks could probably sell the assets to someone else. So it is really a gift disguised as something else.

I expect this will play out pretty soon. Will be interesting and historical to watch.

-->

popular posts

Reading Time: 9 minutes

It’s been a long while since we talked about Local Services ads for lawyers – in the time since then, Google has made a number of changes to this ad delivery method. Today, we want to tell you about how this exciting new platform can get your business in front of potential clients… right when they…

Reading Time: 14 minutes

Okay, confession time: we’ve never been fans of Black Friday. Somehow, getting trampled in a Walmart at 3AM has become a holiday tradition, and the Webconsuls team is not here for it. What we do love is supporting our East Nashville neighbors. As we gear up for Small Business Saturday, consider stopping by one of…

Reading Time: 8 minutes

Looking for Fall COVID-19 Activities in Nashville? Today is the first day of fall! Tonight, the autumnal equinox marks the start of our Nashville fall celebrations. You’re officially okay to buy stashes of candy, start decorating for Halloween, and put some hot cider into themed mugs. We know that our festivities will look a bit…