And of course, if [the U.S. government] were planning to take over the banking system, they wouldn't announce it beforehand. They'd probably say exactly what they're saying right now, at least until they got everything set up, until they hired enough people, put all their plans in order...and then one Friday evening, they'd make an announcement...and nationalize the banks over the weekend.
Last week's episode,
"Bad Bank," of
This American Life, has a very basic yet excellent primer on what banks are, how they function, and what is at the core of the current banking crisis - toxic assets, balance sheets, mark-to-market, write-downs, and the like. Alex Blumberg and Adam Davidson use a simple scenario to illustrate how banks are capitalized and what can lead to insolvency. The basics are simple but can be difficult to understand while trying to ignore things like mortgage-backed securities, CDOs, CDSs, ARMs, TARP, TALF, FDIC and other esoteric financial instruments and inscrutable acronyms.
There's also a great discussion with Simon Johnson, former chief of the International Monetary Fund (IMF), Professor at MIT's Sloan School of Management, and - most impressively - fellow
blogger, about the pros and cons of nationalization.
Columbia prof David Beim discusses this
graph, which is frightening. Currently consumers owe 100% of GDP - some $13
trillion. The only other time the Household Debt to GDP ratio has been 1:1? 1929:
"The problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us... We've been living very high on the hog. Our living standard has been rising dramatically in the last 25 years. And we have been borrowing much of the money to make that prosperity happen."
It's not as simple as forcing the banks to lend, unfortunately.
In the second segment they talk to a couple entrepreneurs of Mortgage Strategies, who are buying mortgages from banks at a discount and negotiating with homeowners to either refinance their mortgage at a much lower monthly payment (but still very profitable for MS because they bought, say, a $400K mortgage for $200K to be refinanced at $300K), or stay in the home and rent it from MS.
Of course these are just a couple guys, and although they are smart and able to bring in investors, they are only able to handle a tiny percentage of the total mortgage debt out there. Also these are simplest of these assets - just a mortgage between a bank and a homeowner. They aren't exposing themselves to the intricate mortgage-backed securities. Still, it's a free-market solution that shows that even right now there is money to be made and people are taking risks to make it. That's some good old-fasioned American know-how (plus Columbia MBAs and millions in investor capital).
The
TALF is actually a gov't sponsored version of this for things like small biz loans, student loans, and car loans, aimed to give private equity generous lending terms with Treasury backing any potential loss due to consumer default. Good idea but possibly implemented too late - such securitized lending still requires consumer demand, which has all but vanished right now.
It's a great show. Take a listen when you get a spare hour. Very helpful for laymen like myself understand WTF is going on right now.
