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Thursday, August 13, 2009

What The Government Really Should Have Done

There is a great deal of back slapping and self congratulation going on in Washington these days about how wise and courageous government policy pulled the country back from the abyss. That claim deserves some close scrutiny.

What actually happened is one man, basically, declared we were facing an abyss, Henry Paulson, former chairman of Goldman Sachs. He then convinced a few other people that there was an abyss. What there actually was is a couple of investment banks facing considerable losses because of their own bad judgment. And the lead troubled bank was Goldman Sachs.

Paulson's plan was to transfer huge amounts of your money to Goldman Sachs and a couple of other banks to keep them from bankruptcy.

So what should have happened? Those deeply troubled banks should have been made to change from investment banks to commercial banks. That can be done in less than 24 hours. In fact, that is what they did AFTER they received billions of dollars of your money.

As soon as they became commercial banks, they would have become wards of Federal Deposit Insurance Corporation, which would have forced them into bankruptcy, re-organized them, sold off assets, and cleaned up the mess. The FDIC is extremely skilled and practiced at that job and has been doing effectively for decades and is doing it today.

Would that action have cost a lot of money? Absolutely, but not nearly as much as the bail out plans that were actually put into place.

In addition, the policy of moral hazard would have been firmly established. Or, in Colin Powell's terms, "You break it, you own it".

In addition, we would not have to be faced with the egregious bonuses now being paid by the same Wall Street banks.

Finally, we would have solved the Too Big To Fail problem for once and for all. (maybe)

But if we had followed this plan, Goldman Sachs would probably be out of business today instead to rolling in record profits.

Oh damn, I knew there was something I overlooked in this scheme. Can you figure out what that would have been?

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