Saving failed banks is *exacerbating* credit crunch, not solving it
The “experts” keep telling us we need to pour trillions of dollars into our sick banks (and non-bank financial institutions) to make them healthy so they can start lending again. But if the goal is to spur lending, shouldn’t we pour our money into healthy banks (or create new banks with healthy balance sheets)? An analogy: If we wanted to quickly build a tower, should we find a deep hole in the ground and pour in lots of dirt and then start building or should we just find a flat piece of land (or a hill) and get right to work?
Analysts at The London Forex Broadsheet seem to agree:
Setting up a so-called “bad” or aggregator bank to purchase the banks’ toxic assets is all the rage now among some of the leading economists, politicians and government officials, but the idea is an unworkable disaster which needs to be immediately abandoned. Instead, what really needs to be set up by the government is a new “good” bank to make good, new mortgages for the many well-qualified buyers which now exist, especially because prices have made such a steep decline. Those buyers will include families who wish to live in them as well as investors seeking a return on capital…
[T]he only thing the bad bank solution does is to transfer the risk from the private to the public sector. It does nothing to stabilize home prices and therefore cannot stimulate demand, which can only be accomplished once buyers come to the realization that prices can stabilize and begin to rise within a reasonable amount of time. Another assumption of the bad bank solution is that the removal of toxic assets from the banks' balance sheets will then allow them to begin lending again. While this has happened in the past after the Resolution Trust Corporation took over certain assets from failed institutions, those instances involved more isolated markets. In this instance, the problem is far more systemic…
Setting up a new “good” bank designed to make high-quality loans is the long term solution to the housing problem for one simple reason; it will jumpstart demand at a time when a huge “buy low” opportunity exists because it will create the sense that prices can stabilize and then begin to increase. By one measure, housing affordability is at an all-time high; a family earning the median income has 158.8 percent of the income needed to qualify for a mortgage on a median-priced home.
Posted by James on Thursday, February 05, 2009