See WSJ interview of Shelia Bair: blogs.wsj/economics/2013/09/10/sheila-bair-u-s-banking-system-still-fragile/ Shelia Bair has it absolutely right when she says, “Look, if you prop up very large institutions they have a lot of bad assets on their books, yeah, they spend a lot of time nursing their bad assets. It makes them conservative. It makes them cautious. Even now you see the smaller banks doing a lot more lending than larger institutions.” Balance sheet crises plunge households into negative equity, and because the banks are holding the mortgages, they suffer negative equity. Some 440 plus small to medium regional banks failed from 2008-2012. Their balance sheets were all repaired, rebooted and positioned for lending again. If you do not do this, and allow/encourage the banks to hide their negative equity by overstating the book value of their mortgage asset, it means that the return on new loans cannot flow to new investors, and is diluted by the claims of incumbent investors who were rescued from de facto bankruptcy. The cost to the economy is that we are stuck in a low-growth rut, and spinning our wheels. The political process ALWAYS will protect incumbent investors because they are the squeaky wheels that funds political candidates and lobbyists, and quite naturally do not want to take their hit. These facts cannot be hidden from the market; it is why BA and C shares sell for 70% of book and WFC sells 135%. I believe, however, that the first priority in restructuring mortgages is through the bank failure process, and new private capital. Kicking the negative equity can from the private sector to the public sector as a future taxpayer obligation does not reboot balance sheets for the economy as a whole, Shifting it to the public sector is, however, better than the Bush-Obama stimulus. If you are going to incur more public debt anyway, better to use it to repair household and bank balance sheets and set the stage for a return to growth. Best of all, follow policies that avoid housing-mortgage market bubbles in the first place, because all roads out are painful.
Posted on: Wed, 11 Sep 2013 16:17:15 +0000
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