We are now in the eighth month of extraordinary efforts to reverse the financial crisis. Tillions of dollars have been spent or guaranteed with the stated goal of getting the banks to lend again. Many acronymic plans like TARP, TALF, PPIP and countless others have been devised to accomplish the goal. Yet, it seems that for all the efforts of the Fed and Treasury, little has been accomplished, other than reward bad behavior in the Financial Markets. The more they direct their efforts only toward the largest institutions, the better the hedge becomes for bondholders everywhere. This has been the achilles heel of all the bailout plans, going back to Paulson/Bernanke and right up until today.
I think Joseph Stiglitz has been out of the country for an extended period or we would have heard more from him about the PPIP. He was recently interviewed by Der Spiegel in which he makes a suggestion that is the antithesis of the governments efforts to date.
What do you suggest?
We have to reorganize our bailout system for the financial sector. For one thing, any bank that actually lends should get money from the government; more money to small and medium-size banks in smaller towns and less to Wall Street institutions. The government must also accept the consequences when banks become insolvent ...
… and let them go bankrupt?
No, they have to be saved, because the consequences to the monetary system would be incalculable. But as a countermeasure, these institutions have to be nationalized, which even Alan Greenspan is now demanding. Then the government can close those business segments that have nothing to do with lending and make sure that the banks no longer organize esoteric stock deals that they themselves do not understand.
You can read the entire interview here.
Wouldn't it be a breath of fresh air to see a common sense approach to the problem? I dare say it would be welcomed with overwhelming popular support, but probably not the bondholders and WS executives.