ronpaulforprez2008
09-24-2008, 10:11 AM
http://www.nakedcapitalism.com/2008/09/banking-expert-bailout-not-necessary.html
Looking at failing financial firms, there are two classes of problems, and they are significantly different. In one class, we have essentially solvent firms who are having trouble rolling over short term debt and raising capital. In the other class, we have firms which have such massive locked in losses on their books that they are either already insolvent or will all but certainly become so.
I find it interesting that Bert Ely says of the first class, "Let 'em swim for it, they'll make it." He's in a better position to know, and so the idea of lending in return for equity may actually _prevent_ those firms from selling themselves to private capital in the wings. I'd like to think he's right on that.
What Ely does not seem to well address is the problem of the second class, those firms which really _are_ insolvent, and which aren't going to make it in any form. Unfortunately, many of the big, bad problems we have seen so far reflect really-o, truly-o BK lenders. As has been mentioned elsewhere, these failed firms failed because they had severely excessive leverage, and have failed very nearly in order of the scale of their leverage, so really this should make for no surprises. And what we do NOT need for insolvent firms are debt-for-equity infusions, because if they go broke their equity is as worthless to the public as it would be to the private capitalists who are refusing to hazard their wealth presently.
What we need to resolve the latter class is a rapid seizure of over-leveraged and insolvent firms. The problem with Lehman wasn't really letting it fail in terms of its losses, but that the failure was disorderly, with sidewise impacts. It would be better for here on out if the firms are simply seized and the wrap ups supervised by a public authority: that is a far better guarantee to avoid market panics than post facto heaving of money bales at shrieking banks and funds which is what Paulson is good for (*yechhh*). ---And it is _exactly_ such a procedure which is completely absent from the Paulson Proposal, the Dodd Proposal, or public debate, other than Hussman's Open Letter which may be beginning to get some traction.
Soooo all of our present proposals fail to focus on the one form of intervention which is _most_ needed to avoid systemic crisis and sudden illiquidity. How smart is that?
Looking at failing financial firms, there are two classes of problems, and they are significantly different. In one class, we have essentially solvent firms who are having trouble rolling over short term debt and raising capital. In the other class, we have firms which have such massive locked in losses on their books that they are either already insolvent or will all but certainly become so.
I find it interesting that Bert Ely says of the first class, "Let 'em swim for it, they'll make it." He's in a better position to know, and so the idea of lending in return for equity may actually _prevent_ those firms from selling themselves to private capital in the wings. I'd like to think he's right on that.
What Ely does not seem to well address is the problem of the second class, those firms which really _are_ insolvent, and which aren't going to make it in any form. Unfortunately, many of the big, bad problems we have seen so far reflect really-o, truly-o BK lenders. As has been mentioned elsewhere, these failed firms failed because they had severely excessive leverage, and have failed very nearly in order of the scale of their leverage, so really this should make for no surprises. And what we do NOT need for insolvent firms are debt-for-equity infusions, because if they go broke their equity is as worthless to the public as it would be to the private capitalists who are refusing to hazard their wealth presently.
What we need to resolve the latter class is a rapid seizure of over-leveraged and insolvent firms. The problem with Lehman wasn't really letting it fail in terms of its losses, but that the failure was disorderly, with sidewise impacts. It would be better for here on out if the firms are simply seized and the wrap ups supervised by a public authority: that is a far better guarantee to avoid market panics than post facto heaving of money bales at shrieking banks and funds which is what Paulson is good for (*yechhh*). ---And it is _exactly_ such a procedure which is completely absent from the Paulson Proposal, the Dodd Proposal, or public debate, other than Hussman's Open Letter which may be beginning to get some traction.
Soooo all of our present proposals fail to focus on the one form of intervention which is _most_ needed to avoid systemic crisis and sudden illiquidity. How smart is that?