Yesterday, Kansas City Fed President Thomas Hoenig unleashed “the most detailed criticism of the Treasury’s actions by a Fed official since the financial crisis began,” hitting the Treasury Department for “drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis”:
If institutions — no matter what their size — have lost market confidence and can’t survive on their own, we must be willing to write down their losses, bring in capable management, sell off and reorganize misaligned activities and businesses and begin the process of restoring them to private ownership.
In other words, nationalize the financial institutions that are causing all the trouble.
Thus far, the Treasury has been advocating an approach based on Treasury Secretary Timothy Geithner’s potentially flawed assumption that the toxic assets clogging up the banks are not, in fact, almost worthless, but are merely stuck at an “artificially depressed value.” At least outwardly, Federal Reserve Chairman Ben Bernanke agrees.
But Hoenig’s assessment is pretty spot-on. After all, taxpayers own 79.9 percent of AIG, 36 percent of Citigroup, and have sunk $45 billion into Bank of America. Why should we pump money into these institutions bit by bit, keeping them alive as zombies, when we could nationalize and start the process of cleaning them up?
Remember, through the FDIC we’ve nationalized two banks a week this year. Hoenig advocated using a similar approach for all failing financial institutions, which would require setting up some mechanism for running banks that are clogged with securities and breaking up large, complex institutions (like AIG) into smaller, more manageable parts.
As ProPublica showed this week, most of the assets in the banking system are held by five large firms: JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, and Goldman Sachs. So this isn’t even a question of nationalizing the whole system, but of identifying where the real sickness is and isolating it. In any case, Treasury needs to end “the big dither” when it comes to the banks, because the economic recovery is going to be hindered as long as the banking system is stuck in neutral.