Wednesday, March 04, 2009

Zombies and nationalization, what's it all about?

With all of the non-stop, mega-volume talk about "zombie banks" and how nationalization of banks is the only way to go, one has to wonder whether President Obama and his team are really as bone-headed stupid as their critics suggest. So, what is really going on?

Put simply, it is all about sour grapes and lobbying.

First, let's acknowledge that there is always more than one way to skin a cat, and that includes dealling with so-called zombie banks. So, maybe critics half a half a point in that their proposals could work. The problem is that these critics refuse to accept what I just said, namely that there are in fact multiple possible paths that lead out of the current financial swamp. Alas, pride, ego, and ideology prevent the critics from admitting any such thing.

Second, the whole concept of a bank being a so-called "zombie" is predicated on all of their "risky" credit assets effectively being worth zero or at least something very far from 100 cents on the dollar. The real problem is that we will not know the true value of many of these assets until the economy is back to normal growth mode. Until then, hard-core freemarketeers will insist that all "risky" assets are effectively worth zero. Their ideology and possibly even personal trading positions prevent them from allowing that a significant fraction of these risky assets will be worth something much closer to 100 cents on the dollar a few years from now. In short, one man's "zombie" is simply another doctor's hospital patient. Never confuse the present with the future. The future has to be worth something to any sane person, but those who drone on and on about zombies can admit no such thing.

Third, many of these critics are probably just shilling for pals who have bearish trading positions that are bets on the decline or failure of the various financial institutions. Even if they do not have a direct position, they may pal around with traders and speculators who do and essentially be their mouthpieces.

And then there is the media. They love a juicy story. Negativity sells. They are out to make money, not enlighten you.

The real bottom line is that many of the critics are much more interested in lobbying for their pet plans than allowing that the administration economic team might succeed.

Treasury and the Federal Reserve may not yet have all of their ducks lined up yet, but they are actually doing an outstanding job and much more likely to succeed than their critics will ever be willing to admit, even after the fact.

Yeah, our major banks sure have made a lot of mistakes over the past five years, but it would be far better to allow the administration economic team to continue their efforts, which includes course adjustements as reality evolves, than to try to bend to every self-serving criticsim and proposition that critics lob at them.

Personally, I do not see any of the big banks as likely to fail or in need of true nationalization. All of them are in fact lending, but not to the excess we saw during the housing boom. I see no merit in referring to them as zombies. Yes, more bailout money will clearly be needed (a trillion, maybe two?), but their trajectory is getting better as each day, week, and month goes by.

The good news is that the evil old Wall Street which was the primary driver of the excesses of recent years is rapidly vanishing.

In short, no sane American need lose even a moment of sleep at night worrying about "zombies" and "nationalization".

-- Jack Krupansky

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