The FDIC Approach

We have been arguing, here and elsewhere, for a banking approach centered around scaling up FDIC-interventions. Part of the pushback is (1) Congress won’t provide any more money, (2) there is no point in even going to ask, and (3) if you did go ask, that could be destabilizing.

In that context, I’m encouraged by the moves in and around the Senate at the end of last week to increase the resources available to the FDIC (for details, see my assessment on The New Republic’s site this morning).  The Administration seems to be taking the lead and key senators are coming on board.

There are still a lot of pieces that can go wrong: the vaunted “stress test” looks weak, the signals on banks from the Fed and Treasury are mixed at best, and the banking lobby is digging in for a long struggle.  And the world economy is going to put severe pressure on any approach.

But eventually we will turn a corner and, at that point, the FDIC will likely play a central role.

9 responses to “The FDIC Approach

  1. How much more money are we talking about? What are the estimates of what we’d need to get authorized?

  2. Does FDIC have the personnel to handle big banks?
    By the way, did you read what was published about Keating’s comments about Geithner?

    See:

    shttp://www.smh.com.au/opinion/obamas-economic-saviour-savaged-as-keating-lets-rip-20090306-8rk7.html?page=-1
    Obama’s economic saviour savaged as Keating lets rip

    Have you read what Scholes said about OTCs?
    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNRppMJqgURA
    Scholes Advises ‘Blow Up’ Over-the-Counter Contracts (Update2)

    Considering we have $700 trillion worth of these OTCs of which government support will hit an unsustainable wall, no matter how many payouts of AIG bets paid to US and European banks, this is a a road to oblivian that needs to be shutoff.

    http://www.marketwatch.com/news/story/700-trillion-elephant-room/story.aspx?guid=024DB809-8506-4AA9-83BB-B053FD4E1C11&dist=TNMostRead

    THOMAS KOSTIGEN’S ETHICS MONITOR
    The $700 trillion elephant

    http://online.wsj.com/article/SB123638394500958141.html
    Top U.S. , European Banks Got $50 Billion in AIG Aid
    http://blogs.ft.com/maverecon/2009/03/the-feds-moral-hazard-maximising-strategy/
    The Fed’s moral hazard maximising strategy

  3. I assert we need a radically different approach to this economic downturn. I think Robert McHugh, Ph.D., is on the mark when he suggests there needs to be shift in focus – to the American household, and away from bailing out financial institutions and creating bigger government. Some of Dr. McHugh’s suggestions:

    1. Rebate 3 years income tax.
    2. Set a maximum limit on credit card interest rates – e.g. 10%.
    3. Catastrophic health insurance should be made available for $200.00/month.
    4. 30-year mortgages should be available at 2% interest.
    5. Lower the aggregate taxes on small businesses.

    ~~~
    “Bureaucracy is the process of turning usable resources into solid waste.”

  4. @ may –

    yes
    yes
    yes

    thanks for sharing the links!

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  6. IMO the FDIC should have taken over WAMU, Wachovia and Citi, but lacked the expertise and organizational size/structure to handle the task. So instead the FDIC outsourced the takeovers to JPM, WellsF and the fed gov’t bankrolled Citi. Likewise the government also did not want Merrill to fail so they convinced BofA to merge with/takeover managing Merrill. The problem with those decisions is they further destabilized the large banks that took over the failed businesses – thus causing a cascading, crisis of confidence in the US banking system.

    So what’s the next step? Well the government is facing a public that is increasingly skeptical about bankrolling the corporate ICU patients – Citi, AIG, GM, etc. Because of the Svengali-like power of lobbyists on Congress people don’t really trust the decisions Congress is making, nor do they trust the cozy relationships between the Fed, SEC, etc. and Goldman, Citi, etc. Can anyone define conflict of interest? Watching the executive and legislative branches actions play out will make for high drama indeed….just remember your tax dollars are paying for this grand theatre and your economic future rides on a positive ending to this show.

  7. By the way, something else worrying being pointed out:
    http://www.dailykos.com/storyonly/2009/3/8/7452/30422/848/705961
    Wall St. Bailout: Is A Massive Scandal About To Unfold?
    @btraven
    I agree we need a different approach.
    After all isn’t the individual the foundation of it all?

    So what if banks are made whole and companies. But, companies need to have their products bought and banks need sources to lend to. I think banks are being bailed out because of their OTC bets, that need to be dealt in a more productive way. Throwing money down a rat hole isn’t a sound policy, especially for a borrower nation, whose creditors might not be able to finance its boroowing dreams. The window is limited. Got to make the most of what is available right now.

  8. Why not offer everyone government insured mortgages that are fixed for 5 years at 4% and then grow modestly to a ceiling of 6.5% over five years.the 10 yr t bill is 2.9%,base it on that with a 1% profit and servicing fee.This helps everyone by causing a jump in house values in many areas it would return capital to the banks and in those cases where the house values have declined you set in motion a program of negative amortization loans that nevertheless maintain the nominal value of the loans that are being replaced and in many cases defaulted on.Dont create new loans with lax lending standards unless you are replacing an existing loan.The lower payments everyone will now have will free up an enormous stimulating amount of cash each month.

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