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Apr 23, 2009

Throwing money at the banks hasn’t worked, and it never will.

By Alan Stoga

In the depths of the Great Depression, a radio interviewer asked John Dillinger why he robbed banks. “Because that’s where the money is,” he famously replied.
With Dillinger about to be re-imagined on screen by Johnny Depp, screenwriters trying not to confuse modern audiences might think about updating the quote to something like, “because that’s where the money used to be.”
Despite hundreds of billions of dollars of governmental support, the banks continue to suffer from the bad loans made during the housing boom, and the loans that have soured as the recession as deepened. The IMF currently guesses that American banks will have to write down another $600 billion in bad loans and assets by the end of next year—on top of the $1 trillion that has already disappeared.
As long as the banks are burdened with crummy loans, they won’t make new loans—and without new loans, the recession will get worse.
Of course, that’s not new news: President Bush said it a year ago, and he was right: the recession has gotten much worse. Of course, he also said that handing out hundreds of billions of taxpayer money to the banks would solve the crisis. In practice, it’s only kept them from actually collapsing.
The dirty little secret on Wall Street and in Washington is that the banks will need at least $500 billion more by the end of next year—and that’s assuming the economy recovers. The Treasury hoped the new money would come from private investors—but who in their right mind wants to buy into a bank these days?
Answer: no one, except Uncle Sam.
However, since the Congress doesn’t want to be seen giving the banks more money, the Treasury is spending its time coming up with gimmicks to hide the fact that many large banks can survive only with a continuing influx of federal dollars.
At the same time, the people who are running the country are afraid to actually be seen running the banks. So they are betting all that money that the same people who broke the banks will eventually be able to fix them.
It’s clearly not working. Moreover, the more money the Treasury provides, the more politicians want to meddle. The revelation that the Treasury secretary told Bank of America not to reveal to shareholders the massive losses in Merrill Lynch before that deal closed is exhibit one in how not to run a bank.
Somewhere, the ghost of John Dillinger is smiling.
It’s time for a more straightforward approach. Nationalize the banks that are insolvent and auction them off when they are viable. Break up the ones that are too big, and sell the viable parts. Create clear rules so the healthy banks can attract investors and rebuild their profitability.
FDR made history by closing the banks. President Obama can make history by fixing them.

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It was Willie Sutton who made the remark “that’s where the money is.”

Russell Dallen
May 4, 2009