As I noted a few days ago, Paulson’s bailout was the worst possible way to do a bad thing. To the extent that the government had to inject money into the financial system, I explained, it would have been far better to use the “FDIC Resolution” approach, which at least addresses the moral hazard issue by wiping out shareholders and getting rid of incompetent management. Paul Volcker made the same point in yesterday’s New York Times:
The phrase “too big to fail” has entered into our everyday vocabulary. It carries the implication that really large, complex and highly interconnected financial institutions can count on public support at critical times. The sense of public outrage over seemingly unfair treatment is palpable. Beyond the emotion, the result is to provide those institutions with a competitive advantage in their financing, in their size and in their ability to take and absorb risks. …To meet the possibility that failure of such institutions may nonetheless threaten the system, the reform proposals of the Obama administration and other governments point to the need for a new “resolution authority.” Specifically, the appropriately designated agency should be authorized to intervene in the event that a systemically critical capital market institution is on the brink of failure. The agency would assume control for the sole purpose of arranging an orderly liquidation or merger. Limited funds would be made available to maintain continuity of operations while preparing for the demise of the organization. To help facilitate that process, the concept of a “living will” has been set forth by a number of governments. Stockholders and management would not be protected. Creditors would be at risk, and would suffer to the extent that the ultimate liquidation value of the firm would fall short of its debts. To put it simply, in no sense would these capital market institutions be deemed “too big to fail.” What they would be free to do is to innovate, to trade, to speculate, to manage private pools of capital — and as ordinary businesses in a capitalist economy, to fail.
[…] was needed to save us for financial collapse, but in reality was a substitute for a policy (FDIC resolution) that would have recapitalized the banking system without bailing out Wall […]
[…] could have recapitalized the financial system using the “FDIC-resolution” approach, which basically means putting bankrupt financial institutions into […]
[…] with liquidity problems. Institutions with solvency problems should be shut down using the FDIC-resolution […]
[…] the Bush Administration decided to bail out the big firms on Wall Street rather than use “FDIC resolution,” which would have bailed out depositors but at least shut down big institutions that were […]
[…] if the banking system hadn’t been recapitalized (even if it should have happened using the “FDIC-resolution approach” rather than via corrupt bailouts), but that’s a completely separate issue from whether […]
[…] banking system hadn’t been recapitalized (even if it should have happened using the “FDIC-resolution approach” rather than via corrupt bailouts), but that’s a completely separate issue from whether […]
[…] is the right policy. Too bad many GOPers ignored this bit of wisdom and voted for […]
[…] For the geeks who are reading this, you’ll recognize that the policy I’m advocating is often called the FDIC-resolution approach. […]
[…] For the geeks who are reading this, you’ll recognize that the policy I’m advocating is often called the FDIC-resolution approach. […]
[…] the panic, it also rewarded bad choices by those big players. As I’ve explained before, using the “FDIC-resolution” approach also would have averted the panic. In short, instead of bailing out shareholders and bondholders, […]
[…] rather than let those companies fail and use the sensible and non-corrupt “FDIC resolution” method to recapitalize the banking system, we got a taxpayer-to-Wall-Street […]
[…] rather than let those companies fail and use the sensible and non-corrupt “FDIC resolution” method to recapitalize the banking system, we got a taxpayer-to-Wall-Street […]
[…] we needed a TARP bailout that same year, it was libertarians who futilely argued that the “FDIC-resolution” approach was a far more sensible way of dealing with the government-created […]
[…] is basically the “FDIC-resolution” approach that I’ve mentioned before, and it’s sort of what happened in Cyprus (after the […]
[…] is critical. I’ve explained, both in a post criticizing Dick Cheney and in another post praising Paul Volcker, that policymakers didn’t face a choice of TARP vs nothing. They could have chosen the quick and […]
[…] is critical. I’ve explained, both in a post criticizing Dick Cheney and in another post praising Paul Volcker, that policymakers didn’t face a choice of TARP vs nothing. They could have chosen the quick and […]
[…] that the federal government was going to re-capitalize the banking system (whether using the good FDIC-resolution approach or the corrupt TARP approach), then it seems that Presidents shouldn’t get arbitrary blame or […]
[…] sympathetic to the way Sweden dealt with its financial crisis about 20 years ago (a version of the FDIC-resolution approach rather than the corrupt TARP bailout […]
[…] is critical. I’ve explained, both in a post criticizing Dick Cheney and in another post praising Paul Volcker, that policymakers didn’t face a choice of TARP vs nothing. They could have chosen the quick […]
[…] that the federal government was going to re-capitalize the banking system (whether using the good FDIC-resolution approach or the corrupt TARP approach), then it seems that Presidents shouldn’t get arbitrary blame or […]
[…] sympathetic to the way Sweden dealt with its financial crisis about 20 years ago (a version of the FDIC-resolution approach rather than the corrupt TARP bailout […]
[…] that the federal government was going to re-capitalize the banking system (whether using the good FDIC-resolution approach or the corrupt TARP approach), then it seems that Presidents shouldn’t get arbitrary blame or […]
[…] sympathetic to the way Sweden dealt with its financial crisis about 20 years ago (a version of the FDIC-resolution approach rather than the corrupt TARP bailout […]
[…] sympathetic to the way Sweden dealt with its financial crisis about 20 years ago (a version of the FDIC-resolution approach rather than the corrupt TARP bailout […]
[…] But it’s now become more and more obvious that there was a much better alternative (as I explained in this post giving Cheney a kick in the pants), involving a process known as FDIC resolution. […]
[…] So what’s the downside? There isn’t one, at least compared to the alternatives. Governments would be holding harmless depositors at the failed banks, so there would be additional debt. But this debt would be a one-time burden for a policy that actually stops the bleeding, and there would be no moral hazard since shareholders, bondholders, and senior management at the failed …. […]
[…] So what’s the downside? There isn’t one, at least compared to the alternatives. Governments would be holding harmless depositors at the failed banks, so there would be additional debt. But this debt would be a one-time burden for a policy that actually stops the bleeding, and there would be no moral hazard since shareholders, bondholders, and senior management at the failed …. […]
[…] politicians don’t like this “FDIC-resolution” approach because it means wiping out shareholders, bondholders, and senior management of institutions that […]
[…] all, even former Fed Chairman Paul Volcker recognized there was a much better, non-corrupt, way of recapitalizing the financial sector – what is […]
[…] approach (similar to what was used during the savings & loan bailouts about 20 years ago, which bails out retail customers but wipes out shareholders, bondholders and senior management). Republicans initially held firm and defeated the first TARP vote, but then they folded when the […]
[…] approach (similar to what was used during the savings & loan bailouts about 20 years ago, which bails out retail customers but wipes out shareholders, bondholders and senior management). Republicans initially held firm and defeated the first TARP vote, but then they folded when the […]