Doug writes:
On Oct 1, 2008, at 11:45 AM, Jim Devine quoted Dean Baker:
The weakness of the banks contributes to the downturn, but they are
not the core of the problem. We would still be facing a recession even
if all our banks were flush with cash. Hence the hype about the
urgency of the bailout was an invention.
This really gives me pause. The financial system is imploding, and is in
desperate need of recapitalization.
=========================
What actual evidence is there that major banks like JPMorgan Chase, Bank of
America, and even Citibank (with the most exposure to MBSs) are starved of
cash and "mploding"? By all appearances, they seem to have strengthened
themselves at the expense of the defunct investment houses and weaker banks
like Washington Mutual.
Why do they need a taxpayer bailout? If the asset markdowns pose the need
for the major banks to raise additional capital, why can't they do so
through share issuance, dividend cuts, asset sales, or some combination of
the foregoing drawing on their own shareholders and private capital?
The Paulson plan departs from the norm from previous bank bailouts in two
major respects: a) it proposes to buy distressed bank assets at above market
prices, rather than taking them over and liquidating them, with the revenues
accruing to the taxpayers, and b) the bailout is not limited to clearly
insolvent institutions, but to all banks indiscriminately, including the
aforementioned JPMC, B of A, and Citi.
Given these two conditions, why would any savvy banker try to tap the more
stringent private markets or make their own shareholders pay if they have
some assurance that governments will take their junk off their hands at
above market prices? Why should banks risk lending to each other without
knowing the extent of their opaque liabilities when they can borrow easily
and risk-free from the new lending facilities opened to them by the central
banks pending their successful pressure for more massive state bailouts?
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