The Banking Crisis: Where Do We Go From Here?

Preface

Well folks, we are now in the middle of the most incredible economic vortex any of us has ever seen or could have imagined. I say it is time to take some critical, concrete steps to stem the tide and stop us from drowning.

The FDIC Fund

Let’s face it, at 40 basis points (even with a likely 10 basis point special assessment), the deposit insurance fund is probably going to be tapped out soon. If only those assessments had continued during the last decade of unparalleled prosperity and earnings. Oh well, one can dream. But back to reality. The FDIC, in this man’s opinion, has to allow banks that have a reasonable chance of surviving to gradually wean themselves off brokered deposits and not go cold turkey and expire from lack of liquidity while still possessing adequate capital.

If we accept the premise that the fund is inadequate, we must move away from a liquidation to a going-concern mentality. Only time will heal the wounds we have inflicted on ourselves. This is especially the case now that the industry is too crippled to fully replenish the fund.

Mark-to-Market Accounting

The notion of mark-to-market accounting of assets in a true fire sale environment is ludicrous and becomes a self-fulfilling prophecy. Stop it! This is again a liquidation, not going concern approach. If you were to dump a huge amount of any product on the market all at once, of course prices would hit rock bottom. Has anyone in Washington, D.C. ever heard of supply and demand? How about reading Chapter 1 of Samuelson on Economics?

As my old D.C. friends remind me, “D.C. is an island surrounded by reality.” Out of touch is a true understatement. Allow banks to dispose of toxic assets in an orderly fashion or else we are just socializing the losses and privatizing the profits.

Government Guaranteed Loan Program

Finally, a small light went off with the recently announced Fed $200 billion lending program. It needs to be some multiple of that. The Stimulus package is an expensive bureaucratic, ill-conceived, time-consuming waste. Why not simply have a massive government guaranteed lending program similar to the SBA, allowing banks to lend to businesses and individuals? Isn’t it better to keep these distressed small businesses alive and keep people in existing jobs than creating make work jobs and positions that will take forever to develop at $250,000 a pop? This will temper the awful unemployment trend and let people keep their dignity and stay engaged.

Conclusion

I realize that this is a very complicated problem, but taking concrete steps to rebuild consumer confidence in the economy and our banking system is a good way to start.