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Geithner’s Recipe for Zombie Banks

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"Geithner’s Recipe for Zombie Banks"

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My Wonk Room colleague Pat Garofalo says almost everything that needs to be said about the latest twist in Tim Geithner’s bank thinking, but I thought I could add a picture of a zombie and a little bit of real talk. Geithner says:

GEITHNER: I think that’s the wrong strategy for the country, and I don’t think it’s a necessary strategy. What we need to do is to make sure that these institutions have the resources necessary to perform their critical function on an ongoing basis in our economy as a whole.

That bolded part is quite right. But “these institutions” need a lot of money. And giving them that money isn’t in opposition to nationalization. These are two great tastes that taste great together. If the banks are owned by the same people who own them now, and managed by the same people who manage them now, then it’s going to be extraordinarily difficult to persuade the congress and the public that we ought to make enormous transfers of funds from the taxpayers to those owners and managers. What’s more, the banks will continue to be managed by the same bad managers who got us into the current situation. As a result, we’re going to wind up giving the banks less money than they really need to take off. And they’ll continue to be managed poorly. So they’ll continue to be wards of the state. And no private investors are going to want to give smaller, healthier banks the capital they would need to expand and thrive. Consequently, our economy will continue to be dominated by large, semi-dead financial institutions that hamper growth.

By contrast, if the public takes ownership of the banks then you’re talking about transferring funds from the public to a publicly-owned entity. And the idea would be for the publicly-owned entity to be re-sold to the private sector. Under the circumstances, the case for making the transfer as big as necessary to create genuinely healthy banks—as opposed to the minimum needed to prevent a total catastrophe—becomes clearer. You also have the opportunity to throw out the top layer of management and especially the inept boards that created the situation.

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