How can we fix this mess?
Classic 1929 bank run at New York's American Union Bank
As with any type of disaster, the news become filled with so-called “experts,” dishing out advice on how to fix it. This recession is just the same. I heard people dole out every type of advice imaginable, from nationalization, capitalization, leave them alone, blow them up, etc. etc. Everyone points out prior recession and fixes, including the Japanese “zombie” banks, the Savings & Loan crisis, the Great Depression, etc. etc. Although hindsight is 20/20, and can help provide a peek into the future, each crisis is different and requires a different method to bring things through.
Most noted lately was the lost decade in Japan. The government doled out ungodly amounts of yen into the banks to shore up their balance books, yet although they survived, they didn’t operate as banks really. Hence the term “zombie.” Japan eventually changed their tactics and took over these failing banks, which finally brought those years to rest.
But I ask, is this the best model we can go by. Sure, on their outside, their similarities are striking. Unfortunately, the financial world is drastically different since then. No two recessions are the same nowadays. Banking strategy is like technology, and many of the instruments behind the lost decade are somewhat obsolete. So while on their outside they appear alike, the gears are much different.
Want an analogy? Ask a Chevy mechanic to work on a Volkswagen, and he’ll probably tell you no. Why? A car is a car right? They both have four wheels, a motor, brakes, steering wheel, etc. etc. etc.? As much as they are alike, they are also just as different. Volkswagens require a different set of tools, systems are designed differently, layouts are different. Many things that a Chevy mechanic could do without a thought on an Impala, he would have to spend much more time and money to find out how to do the same thing on a Jetta.
Instead of looking at the last time a banking system collapsed and finding answers, we need to clear the page. This takes more time but can create a more effective and efficient result. The TARP funds were a decent idea to help prop up banks, now lets use this time to find an answer before they fall over.
First we should examine what is killing the banks. What is driving these things to hurt these institutions? Instead of asking why the banks didn’t catch them in the first place, we need to examine what did it. From there we can answer how they were missed. (more…)
