Insolvent banks have to be taken over by the FDIC, the shareholders wiped out, bondholders have to take a haircut, management has to be replaced and the bad assets have to be written down. Why throw public money down a rathole?
Stiglitz says: "banks are in very bad shape.... hundreds of billions of dollars has had no effect.American citizens have become majority owners in a very large number of the major banks. But they have no control. Separation of ownership and control is a disaster".
Galbraith says: "the large banks, which the Treasury is trying very hard to protect, cannot be protected, they are insolvent. The proper approach for dealing with them is for the Federal Deposit Insurance Corporation to move in and take the proper steps for an insolvent bank".
Citigroup, Bank of America, JP Morgan-Chase and Wells Fargo are holding two-thirds of all the toxic mortgage-backed paper. These banking Goliaths have powerful constituencies and substantial political power.
Timothy Geithner is point-man for these banksters and he is fending off nationalization. Geithner admitted so to Brian Williams when he said he intended to "keep the system in private hands". It will take many trillions to keep these dinosaurs from extinction.
It is shocking to realize that the financial crisis started 19 months ago (when two Bear Stearns hedge funds defaulted) and still, no one has any idea of what their assets are really worth. Price discovery is basic, instead fear has carried the day. Everyone in power is terrified that trillions of dollars will vaporize.
Geithner has a plan, but wants to keep the public in the dark. After all, there's no graceful way to tell people that they are about to get shafted for another $2 trillion to keep Wall Street on Dom Perignon and chocolate.
As the head of the FDIC, Sheila Bair is the regulator who should be in charge of checking capital reserves and closing banks. But, apparently, Bair has been crowded out. Geithner and his insider friends are calling the shots.
Securitization has been Wall Street's golden goose. It's a way to maximally leverage ever smaller slices of capital. As borrowing increases, asset prices rise, making the system more and more unstable. When the bubble finally bursts; tremors rush through the economy sending assets, equities and employment plunging.
40%, nearly half the credit pumped into the economy comes from securitization. The banks ARE lending, but Wall Street's credit model is broken, killing auto sales, consumer spending and foreign trade.
Credit production should never be in the hands of speculators. It's too dangerous. Banks must be strictly regulated, because the power to create credit is "more dangerous than standing armies".
Geithner will not succeed. Every attempt to save the banks will be met with greater public resistance and rage. Failed banks need to be put out of their misery and nationalized.
Excerpted from Mike Whitney @ Counterpunch
