Make that rent, and you have the reality of the middle class for almost three decades. Inflation is eating savings. The difference between the interest rate at which banks can borrow taxpayer money, and the interest at which taxpayera can borrow from banks, is the subsidy that is meant to restore an insolvent bank industry to solvency. If present income barely exceeds rents, then serfdom already prevails. If serfdom is not your reality yet, then you might be one of the few who benefited, not one of the many who paid for, are paying for, and will be paying for our gentle investigation as to the subtle differences between illiquidity and insolvency.

But can banking and financing activities be segregated so that there is no point of contact between the two where the first set of boring banks rely on guarantees, explicit or implicit, from the more exciting shadow banking system?

There surely will be a grey zone at the interface between the two -and if the shadow system continues to conduct business in a similarly reckless fashion to the status quo ante then the same systemic problems could arise yet again as troubled assets and obligations end up being intermingled amongst the two different kinds of banks.

It’s one thing to say that the shadow banks will have no federal guarantees or safety nets but when things start to go wrong and markets seize up through illiquidity will the government really take a hard line and not come to the rescue. This is especially the case if the shadow banks have cross border risks with currency instability implications.

It may come down to a choice between a Fed/Treasury clean up operation or a supra-national (IMF?) clean up operation.
I doubt whether we would see too many hands go up if we asked who favors the latter

I think how we get out of this (bankruptcy or inflation and the attendant reforms) will determine whether or not we’ll get right back in.

While times are slowly changing, I agree that nothing short of a “full faith and credit” crisis, if that, will bring about fundamental reform. It’s tragic (since it’s avoidable,) but the historical evidence seems quite conclusive.

If bailing out creditors leaves money/credit for more of the same, no pledge that “…replacement institutions would explicitly not be guaranteed by the state, nor permitted to become “too big to fail”…” will be credible (remember Fannie/Freddie?)

Just as this bursting bubble is so much bigger than the S&L cisis and perhaps even the Great Depression, if the next one is enabled by current bailouts of sufficient size, it will be bigger still. Rinse, repeat, until bailouts become impossible.

This cycle will repeat as long as financial institutions are allowed to legally create money out of thin air. That has been the common thread of all known financial crises. No tweaks have ever proven sufficient to overcome the extraordinary incentive to get fabulously wealthy with little to no risk.

After so many many failed attempts – and disasters – it is unwise to believe that anything short of removing the rottenness at the core will work for long.

Debt is the immediate issue. We can argue about how we got here, whose fault it is, or the various immoralities and future repercussions with resolving debt in different ways. But debt is the immediate issue. The financial crisis began as a liquidity crisis, but now it is a debt crisis.

There are three ways out of debt – paying if off, renegotiation (bankruptcy/restructuring), and inflation. Or some combination of the three.

The question is whether we have reached the Event Horizon – the point of no return, where debt _cannot_ be paid off, as in the Latin American case. The Latin American crisis is a great example of why sovereign governments should be petrified to take on debt that is denominated in foreign currencies. They can’t declare bankruptcy, and they can’t print their way out.

Without bankruptcy or inflation, the endgame for debt when the interest exceeds future income is serfdom. That is the Event Horizon.

I doesn’t make a whole lot of sense to me that we would spend $trillions of taxpayer money on behalf of financial institutions and then tell them they are limited to, say, $100 billion of assets (pick whatever benchmark you want here). I’m sure other countries would love it if we governed that way, however.

There seems to be a lot of surplus floating around, and I suspect our malfunctioning economic system is based on theory (so far as there is any theory) that cannot in any stable fashion digest the surplus.

Whatever solution we come up with must be able to allow for growing surplus along the two main dimensions: the surplus from slowly rising productivity in “developed” nations, and the jump in productivity when practice transfers from developed to undeveloped economies. This factor has to huge.

The notions presented in the “Baseline Scenario” seem to be a critical aspect, but the growing global surplus is also a critical aspect. How to cover both?

We see a lot of perceptive comments re cause, even some which almost suggest tar and feathers should be applied! However where is the desired result spelled out? If the main thing is to keep the main thing the main thing, then surely we need a finite statement of our nation’s financial services requirements. I doubt that our requirements include bean counters taking ‘fees’ for every contrived movement of paper. Now once we know where we are heading, voyage planning can be fixed.

Many articles seem to interweave personal invective, multiple auxillary issues and rear-view mirror comments of the disaster. I suggest little of this is constructive re the main thing which (step 1) is to define the required unsinkable financial system. Step 2 is to have our elected governement adjust legislation to ensure no other financial shennanigns can be cloaked within a bank. This should take the President about a week?

Questions such as:

Fractional reserve(subject to dynamic government limits?)

Deposit guarantees(requiring operation within approved banking process).

Federal monitoring of all banks’s operations (key measures weekly?).

Criminal charges for villains.

Separation of merchant banking (no guarantees, free to fail)

Securitisation to only be ‘with recourse’

Limit to maximum size of enterprises.

People who don’t want to play ball according to the rule set can take their bat and go home. No driving on our financial highways unless you are licenced and obey the road rules. Penalty is jail and seizing of ALL corporate and personal assets.

I guess these points may take President Obama as much as another week?

Given that we know what is the required outcome we now rero-fit existing banks. What is left (after the retro-fit) is subject to immediate bankruptcy challenge.

The biggest problem plaguing us is uncertainty which feeds lack of confidence. Maybe the hiatus is caused by ‘bankers’ seeking to cover their own interests?

Ok folks, how about we step up to the plate and address the main thing?

That said… Perhaps I am naïve, but I do not think the general picture of “put the existing system into run-off mode” is all that complicated. First you need a commitment that any bail-out be contingent on ensuring it never happens again. That means no institution receives a penny of public funds without being placed in receivership and then run down: Shareholders get zero; boards and senior management get removed; creditors and counterparties… Well, those would be handled “ad hoc”. Maybe we really do need to make whole the creditors of the existing institutions to avoid global collapse. But at the same time, those institutions themselves would be eliminated, and the replacement institutions would explicitly not be guaranteed by the state, nor permitted to become “too big to fail”. “Never again” should be the mantra.

This is really not very different from how the S&L crisis was handled in the 80s. But I bet you can think of a lot of things I am missing. What are they?

But no reforms at all will be politically feasible until the economy gets a lot worse than it is now. I fully expect this to happen as long as the current financial system is in place, forever booming and busting with with the full faith and credit of the U.S… But whether it happens in ten months or ten years, now that is the question.

“First we should just come out and say it: the financial system that led us to the brink of disaster is broken.”

And his reasons for saying this: the financial community has moved its focus toward creating “financial innovation for financial profit’s sake.”

I’m glad to see a conservative express the belief that capitalism works best when money is the means, not the end goal of the enterprise.

I assume that Brady, a Reaganite, is not a liberal, big government guy. He’s a man who, I have to believe, once saw business as the solution to the problems caused by government.

Now even a man like this takes issue with how the financial community has decided to run its business.

The system is irrevocably broken and must be fixed.

I personally like Brady’s idea that the financial market innovators – the ones who like to turn investment into a craps game – would do so without federal guarantees protecting them from failure. You play that game, you could win – AND you could lose. But you enter that high stakes game fully realizing that your failures will not propped up and supported by the government.

A far cry from the reality we see today.