Spooked and Insolvent

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SPOOKED AND INSOLVENT….Atrios sez:

Even now my interpretation is that the Wise Men Of Washington who are “dealing” with this financial crisis believe they are dealing with a liquidity crisis rather than an insolvency one. They think that big shitpile is actually worth something, but that “financial actors” are “spooked.” They think that if banks aren’t lending it’s because they have temporary capital issues because of this, instead of the fact that maybe banks aren’t lending because recession is here and it’s not the most awesome time to lend money for projects.

But why can’t it be both? In the previous post I said it was a bad idea for Henry Paulson to bail out all the big banks instead of reserving funds only for those banks that were genuinely close to insolvency, and this is one of the reasons. Not only did a lot of money get wasted on banks that didn’t want it, but it prevented us from finding out which banks were in trouble and which ones weren’t. If, say, a quarter of the banking industry is insolvent, but nobody knows which quarter, than we have both an insolvency problem and a “spooked financial actors” problem. Sweden solved both these problems in the early 90s by taking over the banking industry completely, but in their case it was really true that virtually every bank was underwater. In our case, it’s not1, and we ought to be spending more time figuring out which banks are viable entities and which ones aren’t. The ones that aren’t can be bailed out or nationalized if there’s some prospect of future recovery, and the rest can be left alone. Result: we still have a big recession, but at least the solvent banks aren’t under the same cloud of suspicion as everyone else and can go about their business semi-normally.

1Well, I don’t think so, anyway. I could be wrong, though!

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DEMOCRACY DOES NOT EXIST...

without free and fair elections, a vigorous free press, and engaged citizens to reclaim power from those who abuse it.

In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America will move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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