How to Fix the Financial Crisis

If I were President, and someone were giving me this advice, I’d be extremely wary. Not because I think it’s wrong, but because I don’t really understand it. It sounds great. It sounds like a solution. But do I really understand enough to know what the unintended consequences could be, what the risks are? Probably not. I’d have to seek conflicting opinions, many of which are going to tell me this is a horrible idea, and will backfire spectacularly. Then you have the unresolved issue of what irrational people are going to do when they hear of this plan? Will there be a panic?

I’m pretty sure Barry Obama doesn’t know much more about this stuff than most of us do. In fact, I’d wager he knows less. That’s what scares me. I’m pretty sure the vast majority of Congress also does not know any more than any of us. You have to rely on the experts. But who are the experts? And what if they disagree?

I’ll probably never understand why anyone would want to be President during a financial crisis. I think Obama is probably arrogant enough to think he clearly knew how to handle it. My job is deciphering complex technical systems for a living, and finance is one of those things that makes my brain hurt. I have almost no understanding of it, even when people try to explain it to me. Barry Obama’s best gig to date is reading speeches from a teleprompter. Please tell me we’re not totally screwed?

Hat Tip to Instapundit

15 thoughts on “How to Fix the Financial Crisis”

  1. Does Obama have the authority to do that? To the extent there are existing contracts and financial properties that would cease to exist by executive fiat, isn’t this proposing what amounts to a massive taking? What’s the givernment going to have to pay out? And who says these guys committed fraud, and need to be banned for life? That’s certainly an easy impulse to have, but remember that almost every financial action they have undertaken ha been either authorized or driven as a result of the financial systems rules that both republicans and democrats are equally guilty of constructing.

    I certainly like the sentiment he expresses, but it strikes me as beyond mere wishful thinking.

  2. The banks are already scrambling to make any sense of what they do or do not own. This would be very bad.

  3. “Bank holidays” are usually done right before a currency is devalued. Gives the bank staff time to GLUE an extra zero on existing bills. Think Zimbabwe.

  4. This is a panic move. Take down insolvent banks in an orderly manner. Don’t cause a run or punish healthy banks.

  5. How will this affect businesses that depend on bank transactions? If something like this is announced, it would certainly cause uncertainty…which is the biggest thing right now that is preventing us from recovering.

    And those who do banking at the little places would be particularly nervous: I don’t do banking at the top ten biggest banks. I do so at a good-sized credit union. But there’s certainly a good number of medium-to-small banks and financial institutions all over the place where I live. How long would this audit take to get to those things?

    And, in the meantime, if you had decided that you don’t like your institution–perhaps you despise the customer service–you will have to wait until all this is over.

    Of course, there’s a way to make things look like they aren’t account transfers: just steadily withdraw you money in drips and dribbles, and then deposit them in a new institution.

    Sorry for the near-stream-of-conscious partial explanation of why this would be bad…but it would terrify me if this happens!

    Which will probably mean that Barry would think it’s a good idea, and try to do it.

  6. My job is to interpret the sometimes specific and sometimes vague ASME Boiler Pressure Vessel Code for a nuclear power plant. Being wrong, or not having the information to back up my decisions will result in scrutiny and fines from the government (who don’t necessarily know the Code any better than I do). Maybe Barry could do my job, it is a lot easier to understand the economy of the US than the ASME Code.

  7. It’s not really a bank holiday if they’re still honoring checks. So long as people can get to their money, they can either transfer it or just keep it in their pocket. There will be bank runs unless the banks are completely shut down during a bank holiday.

    Bailing out the mutual funds at the expense of everyone else is just as dumb as bailing out the insurance companies or the banks or the unions. The institutional investors are as much to blame as anyone else. They shouldn’t be allowed to walk away whole.

  8. A bank holiday would only stop a run for the duration of the bank closings. I would withdraw every penny the very first second the banks re-opened, and many others would do the same. Every dollar not in the banking system would mean many more dollars not in the credit stream. Bad news.

  9. Sebastian, you are assuming Obama wants to help America. In fact, every action he has taken weakens it in one shape or form. He wanted to be President to bring us to our knees because we deserve to feel the pain of the world.

    Onto Karl Denninger …. Karl is pretty knowlegable and his solutions might have worked when Lehman collapsed and before we pumped Trillions down a black hole. Now its too late for his approach, plus I don’t think we need it.

    Most of our problems will be solved once we get the economy moving again. More business drives more jobs which drives home sales and mobility. More business drives investors from saving thier money in T-bills towards investing in companies that are creating wealth. Corporate America is sitting on 1 to 2 Trillion $ of cash.

    How do you get the ball rolling …….. Tax Cuts and Simplification, just like JFK did. Second step, immediately freeze all pending regulations and force government agencies to justify every reg they have on the books or lose funding. Third step, reduce government employment by 30% and reduce the pension and health benefits of the government employees. Force those employees to start working in the private sector. Fourth, withdrawl from the sandbox and redeploy troops on the mexican border. Fifth, end all immigration programs till unemployment is down to 5% again.

    Pretty simple actually. Do the Republicans have the balls to do it. NAH!!!

  10. Karl Denninger? A former geek who is now a day trader? Thank God Obama isn’t listening to him. I’ll take an actual economist or two thanks.

    I’m fairly sure nobody *wants* to be President during a financial crisis. Obama announced his campaign in Feb 2007 and was nominated in Aug 2008, just before the whole cartload really tipped over. I’m not sure what else he could have done?

  11. “I’m not sure what else he could have done?”

    He could have resigned from the Democrat ticket, and let McCain take on the mess…which would probably have been almost as bad!

    I, for one, would not mind being President in a financial crisis, if I had a cooperative Congress. My plan for dealing with such a crisis would just be to reduce taxes, cut spending, and remove red tape regulations that bind the private sector.

    But then, that’s what I’d do without a crisis, as well…and it’s probably a safe bet that I wouldn’t have a cooperative Congress, either! (I’d go after too many cows that are sacred to Republicans, as well as to Democrats–and even to the American People.)

  12. I think it was Winston Churchill who complained that if you asked five economists for an answer, you would get six opinions, and two of them would belong to John Maynard Keynes.

    Whatever happens, a fix is going to be very ugly for at least 2-3 years while the market rationalizes a lot of insane “investments” made during the housing bubble. Someone needs to have the courage to take the bad tasting medicine, warn everyone in advance that this is going to be really ugly, but if we have the courage to allow foreclosures to go through, let housing prices finishing collapsing–AND cut down spending–we’ll come through the other side chastened, wounded, but with a future. Otherwise, we are just prolonging the pain.

  13. “My job is deciphering complex technical systems for a living, and finance is one of those things that makes my brain hurt.”

    Some advantages you have in deciphering complex technical systems:

    1. Network routers have no emotions.

    2. DHCP servers don’t change their protocols to spite you or to get political advantage.

    3. While sending traffic through a switch changes its behavior, it is possible to predict (with some confidence) what a 10% increase in packets will do to response time. The same is not true with markets involving humans.

  14. “More business drives investors from saving thier money in T-bills towards investing in companies that are creating wealth. Corporate America is sitting on 1 to 2 Trillion $ of cash.”

    Have you looked at T-bils (or even T-bonds) lately? I ordinarily keep a bit of money in agency bonds, but lately, these aren’t yields–they are surrenders. I am sitting on a wad of cash at the moment because I am expecting the “quantitative easing” (euphemism for sneaky inflation) to drive up interest rates, and damage the value of bonds of all sorts. I’m hoping that it only gets to the point of 6% 30 year bonds. I fear it might be more like 8%. If so, people with cash will do very nicely, but the pain for the rest of the economy will be severe.

  15. This closely models what actually happened in my city in 1983. Simultaneous, surprise “raid” audits caught the bank owners before they could shell-game assets. Big losers: Savings and Loan account holders (uninsured at the time), stockholders. For everybody else, after the shock of learning your bank just shut down, the doors re-opened and it was business as usual. Except, that Knoxville’s bankruptcy lawyers developed a honed skill level persisting to this day.
    Oh, yes, the owners went to jail.
    Google “United American Bank” or “Jake Butcher” for more than you want to know. Flying high next to Jimmy Carter one day; bankrupt toast the next.

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