First: what’s the difference between banks “earning their way out” of past troubles and earning their way INTO their present ones? The earning power that Mr Surowiecki kind of proudly presents as the stuff of legend is what got us . . . here.

Second: it’s not clear that banks earned their way out of the 1980′s crisis. Maybe they just spent many years – many more than the “couple of years” Mr. Surowiecki says it took for everything to be fine again – negotiating the transfer of their losses to official creditors. See Prof Michael Dooley’s discussion here:

http://people.ucsc.edu/~mpd/econ241c/PDFs/RetrospectiveOnDebtCrisis.pdf.

Third, if the 1980′s is to be the model for rescuing the banking system today, then we’ll probably see some “evergreening”. (C’mon, isn’t that what PPIP is?) As Prof Dooley points out, commercial banks’ “evergreening” of their Latin American loans during the 1980′s was an essential part of the ‘recovery’ process and of the banks’ loss sharing negotiations with their governments. At his presentation at the CSIS last October, Japan expert Richard Koo told the same story about “evergreening” based on his experience at the NY Fed during the 1980′s. And he made the point that such practices may be a necessary and legitimate strategy for banking SYSTEM rescue although contrary to what would be best for any individual bank.

Finally, whether or not it is necessary/legitimate, if a 1980′s-style multi-year banking system rescue is the strategy chosen, the greatest suffering will occur where the debt overhang remains while that strategy is executed. In the US in the 1980′s, that was offshore. Prof Dooley points out that the Latin American debtor countries suffered most while foreign commercial banks and their governments made rescuing themselves the top priority in ‘restructuring’ negotiations.

In the US today, as in Japan in 1990′s, the debt overhang is at home. So US businesses and – especially – homeowners and consumers – will suffer while the banks dance with their governments about who takes what losses and when on the old capital structure. Can’t we already see this in the de-prioritization of real debt (e.g., mortgage) restructuring that produces losses for banks but benefits borrowers and resets the cycle?

So I see more similarities than differences between the US in 2009 and Japan in the 1990′s – epecially if the response to the 1980′s crisis is the model for our response to this one. Where there are differences I think they probably mean today’s US is worse than Japan. For me, the good news is that Japan’s response to the 1990′s, given the problems and the alternative outcomes the Japanese were facing, actually looks pretty good. There are miles to go before we sleep, and as we go we may end up aspiring to “turn Japanese” instead of dreading it.

In other words, the cost of nationalization without any of the control.

In addition, the administration is – and I think this is key to any analysis of the situation – playing politics, as any group of politicians invariably will. Decisions take public opinion and the positioning of political entities into account, and are then presented in a way to underscore the desired impact on voters.

You have to ignore what politicians say and look more toward what they do in a case like this. Is it just a gift? I think it more likely that the real financial situation has been that much worse than anyone is publicly saying – still.

It wouldn’t, it would just mean that the “best and brightest” got wiped out and kicked out. God forbid that these geniuses/”nobles”/insiders should have to pay for their screw-ups, when us peasants can foot the bill.

From Martin Weiss today at his Money and Markets:
“Although it’s cut back a bit, JPM still has 43.6 percent of all the derivatives held by all U.S. commercial banks, or $17 trillion more than Bank of America and Citibank combined. Among the 19 bank holding companies in the stress tests, that puts JPM closer to ground zero than any other bank.”

That’s $17 trillion MORE. Not the total. Goldman Sachs also has huge derivative numbers on the books. Plus it’s unclear whether Treasury or anyone else has a handle on off balance sheet toxic assets.

This the the real reason the TBTFs still exist. Treasury and the Fed don’t know what it will cost to unwind any of these holding companies. So they prop them up as best they can. They dropped a coin down into the hole, and they still haven’t heard it hit bottom.

JP Morgan and Goldman, of course, insist they can handle the derivatives, over time. Maybe they can. Treasury sure as heck hopes so.

But the real fear of Treasury is getting stuck with too much tar from the Wall Street tarbabies.

Personally, I don’t understand why toxic assets have to be paid for when they are stripped from a bank balance sheet. Just do it. Don’t pay anyone anything until accurate pricing can be determined. If it takes 3 years, so what? The toxic assets will perform, or not, no matter where they are warehoused.

Then recapitalize. At least at that point you have a number. Right now with the unpriceable derivatives, no one can figure out what needs to be figured out first before you can take decisive action.

It would be interesting to go into some of these issues.

George (fully “qualified” economist), UK

My delivery is a direct reaction the pain and suffering mercilessly hoisted upon me and my child by the predatorclass swindlers and thieves on Wall Street and by the government who obdurately bows to and shamelessly forks over trillions of taxpayer dollars to those predator thieves and swindlers exclusively while IGNORING and DISMISSING the pain and suffering of the other 99.9999% of the population.

I also issue a warning, that there are limits to the level of abuse the people will tolerate. Slime me if you will, – but trust me, – I am not the only frustrated and angry citizen. The predator class is throwing gasoline on a seething fire.