22 February 2009

Trial Lead Balloons

It's been amusing over the past month or so watching the new Treasury Secretary, Tim Geither, float off a new trial balloon every weekend on a new plan to deal with the insolvency of the US financial sector. I personally, don't see any easy way out. The only reasonable solution appears to be nationalization, and I don't pretend it will be easy for those involved in managing it (last September):
Bank of America, CitiGroup, and JP Morgan Chase have all been busy building the Jenga tower higher (see making the pie higher) in the effort to become too ginormous to fail. Clearly they all expect to be bailed out, which is a pretty amoral way to run a business. "Bail us out or your retirement savings get it!" The appropriate response at this stage is to raise their moral hazard one and audit them, find out that, "Surprize, you're broke!" and nationalize the lot of them temporarily. Cashier the executives, amalgamate the trash from all three and quarantine it, then start breaking them into non-antitrust sized chunks and IPO them off in sequence.
So now, after attempting to float many balloons full of lead, we are finally getting there. Citi now wants the government to buy 40 % of its stock, stopping just short of nationalization. Does anyone really believe we'll be done at that point?

The only question I have, is were these leaks that came from the Treasury real ideas or was Geither just buying time and making an appearance of exhausting all the alternatives? Afterall, nationalization isn't part of the American culture. Cultures change; sometimes tumulteously, sometimes without even noticing.

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