« What is New Trade Theory? | Main | The Deal »
Did the world end today?
Not yet, the economy is staying above water. Toward the future, here is a very good list of credit market indicators to follow. A lot of the credit markets reopen tomorrow. Felix Salmon is optimistic. But in Iceland shoppers are emptying the shelves because it is hard to import food. Kashkari says the Treasury will invest only in healthy banks; of course recapitalization makes the most sense for unhealthy banks. One way to try to figure out what is happening is to work backwards from the lies but that can end up being very misleading.
Posted by Tyler Cowen on October 13, 2008 at 01:29 PM in Economics | Permalink
Comments
Kashkari says the Treasury will invest only in healthy banks; of course recapitalization makes the most sense for unhealthy banks. One way to try to figure out what is happening is to work backwards from the lies but that can end up being very misleading.
It led me to believe these guys are a bunch of crooks. Is there something I'm missing?
Posted by: Bob Murphy at Oct 13, 2008 1:57:35 PM
Shouldn't the unhealthy banks be closed rather than recapitalised?
Posted by: dearieme at Oct 13, 2008 2:04:02 PM
Back to eating rotten shark? Poor guys.
Posted by: odograph at Oct 13, 2008 2:04:12 PM
I agree with dearie. Healthy banks should be recapitalized; unhealthy banks should be shut down in as systemically safe a way as possible.
Posted by: dWj at Oct 13, 2008 2:52:43 PM
This may just be semantics but obviously a sufficiently health bank doesn't need recapitalization at all...
Posted by: Tyler Cowen at Oct 13, 2008 3:01:42 PM
How do we distinguish between healthy banks and "lemons"? Before doing something we should invite banks, particularly those in favor of which any intervention is made, to publicly disclose their positions and make their balance sheets fully transparent. There is no point in recapitalizing and restarting inter-banks lending, forcing or guaranteeing confidence, if no disclosure is made of mutual positions and off balance sheets operations which are causing money market failure.
Posted by: Massimo GIANNINI at Oct 13, 2008 3:10:50 PM
Is there a sizable pool of banks healthy enough to not need recapitalization at this point? My assumption would be no. And for that matter, wouldn't healthy banks be best able to deal with the extra capital, even if they don't need it? Sort of like the old complaint about how you can only get a loan if you don't need it?
Clearly, some kind of more sophisticated segmentation needs to go on. Kill the weakest banks, restructure/recapitalize ones with the potential to be saved, and throw some money at the relatively healthy ones along with some kind of mechanism to ensure that they lend.
Posted by: Greg at Oct 13, 2008 3:12:02 PM
Or, all banks are healthy once you inject enough capital.
Posted by: Andrew at Oct 13, 2008 3:13:41 PM
Kashkari clearly doesn't want to say what he plans to do. If he says the truth ("We will recapitalize struggling banks") he is making his own job much more difficult.
It is getting rather Orwellian, though. All banks are healthy, but some banks are more healthy than others?
Posted by: Mark at Oct 13, 2008 3:16:58 PM
Battlefield triage is a good concept.
Healthy banks don't need recapitalization (or have problems that can be addressed on a more leisurely basis).
Some banks are too sick to save. They will die anyway, and just use up scarce resources in the effort to save them.
In the middle are banks that might benefit.
Posted by: zbicyclist at Oct 13, 2008 3:24:57 PM
Perhaps if we just let the market work, we would be in this mess.
Its never too late to start.
Posted by: Alan Brown at Oct 13, 2008 4:19:06 PM
Moody's downgraded Japan from AAA in November 1998, when its gross debt to GDP ratio was 113.2 percent of GDP and its net debt was 46 percent of GDP. Today the US has higher rate of debt on both measures and quickly getting worse. The EU just announced a 2.3 TRILLION bailout package and some countries are in worse shape.
Can we talk about the ratings of government debt? And how much more expensive a downgrade would future make debt service/budgets? Are government even able at this point to swallow these bubbles?
Posted by: sd at Oct 13, 2008 4:32:46 PM
The trick is to identify banks that are healthy but for the lack of confidence in them. Isn't that all the semantics is about?
Not that it is easy to determine which are in that category. Is there perchance some inside information regulators might have, or that a bank could reveal to anyone seeking a preferred equity stake. If Buffett has this capacity to identify and reinstall confidence in a bank might not the government?
Mankiw has suggested the government offer to take an equal share in any investment of private investor like Buffett is willing to make.
http://gregmankiw.blogspot.com/2008/10/how-to-recapitalize-financial-system.html
Posted by: John B. Chilton at Oct 13, 2008 4:33:14 PM
I would like it written into 'the code' that if a bank is recapitalized, its entire board and executive officers are expunged. No ifs, ands, or buts.
And, let the shareholders make these decisions.
Posted by: meter at Oct 13, 2008 4:46:31 PM
"This may just be semantics but obviously a sufficiently health bank doesn't need recapitalization at all..."
May be the semantics is in recapitalization...may be good banks need the capital infusion to absorb the bad banks...why would that not be a good thing to do? May be in the heat of the battle, anybody trying to do anything is called a liar
Posted by: livingston at Oct 13, 2008 6:04:19 PM
"Moody's downgraded Japan from AAA in November 1998, when its gross debt to GDP ratio was 113.2 percent of GDP and its net debt was 46 percent of GDP. Today the US has higher rate of debt on both measures and quickly getting worse."
To quote Andy from last friday's episode of The Office: That .. doesn't sound right.
Posted by: MM at Oct 13, 2008 6:30:45 PM
I see all of this as a strategic plan for the top bankers and buy out firms to eliminate their competition, and gaining access to taxpayer's money from all around the world. What better way to make yourself richer than by creating a forced financial crisis around the world, then collecting "bail out" money? It's kind of like Wal Mart building close to all the K-marts. Eliminate the competition and you make yourself bigger.
How many members of Congress have a financial stake in the bankers and buy out firms? I can tell you at least two (in Georgia) are linked to a major buy out firm. One of our Senators refused my complaint against a Fortune 500 company because they depend on a key defendant in my cases to raise funding for them. That Georgia Senator (Chambliss) voted to approve the bail out money.
Posted by: SharkGirl at Oct 13, 2008 7:18:39 PM
Now that Iceland is in the news a lot, journalists get to screw up Icelandic naming conventions more often. Remember kids, "___-sson" is not a last name...
Posted by: Andy at Oct 13, 2008 7:48:24 PM
Banks, schmanks -- real companies need loans. Let the Regional Federal banks make loans to any and all companies that have been getting loans in the past. At a slightly higher than previously paid rate of interest.
(Buying commercial paper is similar).
There is no way for the gov't to fairly choose which banks should live and which should die, but if the $12 tril. house value outstanding mortgages have been reduced to $6 tril. in 'market value', then somebody has to eat $6 tril in losses.
That somebody will mostly be the banks ... or taxpayers.
There are far too many banks, doing too little of real increasing production -- and the internet means less intermediation is needed.
Posted by: Tom Grey at Oct 13, 2008 7:48:54 PM
Find the banks that won't have runs but might. Inject capital in those. If they have runs, don't inject the capital in those, but in other banks.
Posted by: Andrew at Oct 13, 2008 8:35:39 PM
If you look at the market caps of the top 20 banks (and yes, this picture has taken on many forms in the past year), you'll notice a cliff around #'s 4/5. While the immediate priority is to provide stability, it seems likely we will need to help smaller regional banks, as they play a crucial role in providing loanable funds to small businesses (as in less than 100 million rev). TARP really doesn't do much for smaller regional banks that weren't major players in some of the most toxic assets, such as "subprime loans" (I still love saying those two words) and had somewhat responsible risk management, as the provisions and charge-offs are being driven by a very small portion of their total books. No small business is going to want to bank with a jpm or B of A and neither one of those giants are going to fight for a small business relationship. The problem isn't really about getting bad assets off the books right now. The problem is funding, and deposits are the cheapest cost of goods sold, which is why increasing the guarantee on deposits may be the best aimed policy thus far, if not quantitatively important for funding costs - give the banks some breathing room, while still allowing them to work through the bad assets they made. I still remember my econ professor saying, "investment spending...fickle". I'm not particularly looking forward to the challenges ahead either, but an axe isn't going to solve the problem, although I still love saying the words "subprime loans". I just hope I don't ever hear my grandkids say "subpar loans".
Posted by: josh at Oct 14, 2008 12:29:05 AM
Presumably with more capital available the healthy banks will be better able to buy out the unhealthy ones. Of course the biggest eminent domain condemnation in world history is still a raw deal.
Posted by: Tom Hanna at Oct 14, 2008 4:45:23 AM
Recapitalization????...yeah rite...if there isnt any capital being installed into the bank then i dont care what you do to change your capital structure....it still will be unhealthy like grease is to a diet!!....might want to consider closing it down......sorry...
Posted by: Josh Wright at Oct 15, 2008 1:38:38 PM
