Thursday, February 26, 2009

I do not know how to fix the economy.

Nobody asked me, but I thought I'd just preempt any demands from the general population.

The discussion over how to "fix" the banking system interests me because I worked in banking policy from 1987 to 1999, and still write or edit the occasional piece for my former employer. During my years in Washington, I was part of the debates on the savings and loan bailout, the banking crisis of the early 1990s, the move to nationwide banking, and the passage of the Gramm-Leach-Bliley Act, which removed barriers between commercial and investment banking.

For what it's worth, I offer two observations about the current crisis.

First, the fact that a few very large institutions are teetering on the brink of failure does not mean that the system itself is broken. Most banks, as we think of banks, are healthy; most people are still repaying loans. Yes, loans have become harder to get, and mortgage money particularly has become more scarce, because our entire structure of mortgage finance transmuted in the last 15 years, and must change again in ways people are still trying to figure out. But the vast majority of banks are still out there, doing what they've always done. They're just not the ones making headlines, and they're not the ones who sponsor stadiums or buy advertising in prime time.

Second, any institution allowed to grow beyond a certain size -- no, I don't know what that size is -- becomes too big to supervise and possibly too big to regulate. I doubt very much that you could find any one person who can tell you every business that Citicorp is in. Years ago, for a client project, I tried to identify the geographic footprints of the nation's 100 largest financial institutions -- that is, I tried to compile a list of every state in which those institutions had a business presence. Six months into the project, I turned in a sprawling list that I had no confidence in; it was just too hard to know who owned what, and what an ownership stake in this business or that really meant.

I don't know what the solution is, and I'm not going to get into it here; but a government guarantee (e.g., deposit insurance, access to emergency liquidity) carries restrictions, and should. The debate over nationalizing banks is silly semantics; as soon as a bank becomes too big to fail, it's already nationalized, and it's irresponsible of the federal government not to look after its investment.

Five Random Songs (since I missed yesterday's post)

"Darling Nikki," Prince. Yes, it's dirty. It's also gleeful and funny. What happened to Prince's sense of humor?

"Regret," New Order. I close my eyes and it's 1987 again, and not in a good way. Next.

"Munich Air Disaster 1958," Morrissey. I've said before that Morrissey often teeters on the verge of self-parody. This song goes right over: a song that mourns the loss of the Manchester United football team in an air crash, but still manages to be all about Morrissey ("I wish I'd gone down/Gone down with them...").

"I'm So Free," Lou Reed. Whew, something happy. Positively boppy, in fact.

"All or Nothin' at All," Bruce Springsteen. From the Human Touch album, not one of his better records, and this isn't one of the stronger tracks.

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