Madness, Madness

Today the Bush admin­is­tra­tion and the Treasury depart­ment are try­ing to rush the Congress into the steeply priced finan­cial sec­tor bailout. This plan calls for the U.S. trea­sury to pur­chase all the bad debt sur­round­ing the sub-prime deriv­a­tives crater, with a cur­rent price-tag $700,000,000,000. I for one, would not be sur­prised if that fig­ure was a low-ball esti­mate, not least of which since even some senior Republicans believe it will cost at least $1t. Whatever your feel­ings on the sub­ject or the cost or other bailouts you want to add, there really isn’t a way to main­tain the finan­cial sys­tem with­out some kind of mas­sive fed­eral intervention.

The price tag, while beyond all com­pre­hen­sion, is prob­a­bly what it will end up cost­ing. And there are a lot of pet poli­cies I’d like to see enacted to pre­vent this sort of thing in the future: a Tobin tax; laws and insti­tu­tions designed specif­i­cally to pre­vent unreg­u­lated instru­ments; a seri­ous rethink­ing of bank­ing accounting/reporting pro­ce­dures (There has been a major, global credit/debt cri­sis every ten years since the 1970s. Something is insti­tu­tion­ally fucked.) Save it and restruc­ture it at the same thing

One thing I wouldn’t do, how­ever, is repeal exist­ing laws enacted dur­ing the New Deal to pro­tect aver­age peo­ple and busi­nesses from the dra­matic down­sides of a poorly-regulated finan­cial indus­try. Specifically, there was a law passed in 1933 that said “invest­ment banks must be sep­a­rate from com­mer­cial banks”. Effectively, this means that National City Bank can’t play the mar­kets, and Morgan Stanley can’t main­tain your sav­ings accounts.

This was done to cre­ate a fire­wall between the spec­u­la­tors and the savers, so when the invest­ment side of the bank got trounced by a mar­ket crash, they couldn’t raid the accounts of depos­i­tors to pay up. This is what has pre­vented the cri­sis from becom­ing a seri­ous, imme­di­ate, bread/butter issue for Americans right now.

According to Bloomberg, this pro­vi­sion is also on the chop­ping block for the bailout.

The money quotes:

“The announce­ment paves the way for the two New York-based firms, both of which will now be reg­u­lated by the Fed, to build their deposit base, poten­tially through acqui­si­tions. That will allow them to rely more heav­ily on deposits from retail cus­tomers instead of using money bor­rowed in the bond mar­ket — the lever­age that led to the undo­ing of Bear Stearns and Lehman.”

[…]

“‘Deposit-banking is king right now,’ said David Hendler, an ana­lyst at CreditSights Inc. in New York. ‘It’s the only mean­ing­ful critical-mass way to make money.’”

In other words, rather than try to cover their losses on bad debt by sell­ing bonds and get­ting swept away, now they will use the money in deposit accounts instead.