The social conservatives conservative socialists have now partly nationalized the major banks. That seems to have been the right thing to do, though I would have liked more strings attached to the move.
But what’s next?
The stock markets have regained a bit and some lending may eventually restart, but the underlying problems have yet to be solved.
There have been some $650 billion of losses from mortgage lending recognized within the banking system, but the IMF expects the total losses to be $1.4 trillion. When these additional losses will get recognized all the capital the governments just injected in these banks will not be enough to make up for them. The situation will then be the same as it was last Friday and require additional capital injection.
The shadow financial system of hedge funds and private equity funds still exists and will need to further deleverage to eventually dissolve. This guarantees another two to four quarters of quite massive selling in about any asset class but, maybe, treasuries.
The Main Street economy will go deep into recession and there are yet no plans on how to soften the fall and eventually restart growth. A big infrastructure program would certainly help.
(For my country, east Europe and Russia: a new fast-freight railroad from Hamburg to Shanghai.)
The collateral damage on pension funds, the Federal Deposit Insurances Corp, municipal funds etc is immense. Is there a way to repair them or do they need to be replaced?
All of the bad side effects from these current gigantic interventions need to be cleaned up. LIBOR manipulation is only one of them. The Fed and other central banks will need to mop up the additional liquidity they injected before it ignites serious inflation.
What we have seen so far can be exaggerated as ‘the poor got robbed so the rich can make more loans to the poor.’
Where is the social benefit?
Can we please have a plan for a financial system that is a service to the economy and not a drag – not a monster that depends on over-leveraged quant strategies nobody really understands?
This one sounds good to me:
[Berkshire Hathaway’s vice chairman] Munger wants Wall Street balance sheets reduced by 70% and insists that the firms "be a market maker, a broker, an underwriter and a custodian of securities but not the hedge funds they have become." He wants to restrict leverage to 50% on every securities transaction except for the Treasury trading desk where "you’re dealing with the safest securities around."
…
To rid Wall Street of its Las Vegas tone, Munger suggests leveling the options exchanges in Chicago and New York, and banning completely all derivatives contracts, a rather impossible vision but one that’s true to his spirit.
Banning derivatives is certainly not an impossible vision. Declare them illegal and send anyone to jail who uses them anyway. But even if we have plans to make banking as boring again as it should be, how do we get from here to there?
There seems to be no unified plan yet on how to tackle all the above problems. I am afraid the only idea people will come up with is to again inflate the system and feed cheap money into it until another bigger bubble of fantasy profits forms somewhere (alternative energies are a candidate). That was the Greenspan strategy which created the current problems.
The politicians seem to believe that now all is well and we can go again down the same old path.
That is wrong and we need better ideas. Those ideas will a first view seem radical or shrill. But a year ago socializing Wall Street was a shrill idea too.
I’ll try to come up with some policy ideas over the next days. Any suggestions are welcome. What are your’s?