How To Kill A Zombie

Here is a cogent, thoughtful analysis about Obama and Geithner's strange reluctance to unwind and dissolve "zombie banks" from (gulp) Arianna Huffington. The financial crisis has officially turned America into the Strange Bedfellows Lounge 

The battle lines over how to deal with the banking crisis have been drawn. On the one side are those who know what needs to be done. On the other are those who know what needs to be done -- but won't admit it. Because it is against their self-interest.

Unlike the conflict over the stimulus package, this is not an ideological fight. This is a battle between the status quo and the future, between the interests of the financial/lobbying establishment and the public interest.

What needs to be done is hard but straightforward. As Martin Wolf of the Financial Times sums it up: "Admit reality, restructure banks and, above all, slay zombie institutions at once."

She even calls on Congress to stop getting distracted by the leftist show-trials and get down to some serious work. Come on, Arianna! If you don't want show trials, then you really don't know the first thing about being a progressive!

There is one piece of her analysis with which I disagree: that the calls to slay zombie banks are non-ideological. Wrong. There are plenty of people who don't want the banks to go away, even in their present zombified form. The welfare state loves the big banks for their tax revenue. Globalization advocates love the idea of "transnational" financial institutions loyal only to the wealthy and connected. "Affordable Housing" advocates love how huge banks, with their billions in deposits, can fund their redistributionist ambitions. And, the banks - even in their "deregulated" (hah!) form - fit perfectly with the regulatory/financial scheme first developed in the Thirties, and then mated business models in the Eighties.  

Nationalizing and winding down today's "too big to fail" behemoths would inevitably result in a banking system that is more decentralized and regional in nature. The reimposition of lending standards would also blunt their ability to lend promiscuously. The very real risk exists that whatever banking system that emerges will be smaller and grow more slowly with similar effects on the rest of the economy. And, the idea of nationalizing and unwinding "bedrock" institutions like Citibank and AIG would give anyone reason to pause. 

Still, I think people would accept the temporary pain in exchange for the opportunity to reset the clock, as it were, and remove the poison from our system.  The idea of simply handing further billions to Citibank or its brethren is not just unpalatable; it is economically irrational. I have seen an estimate that we could create the much-vaunted "smart" electrical grid at a cost of $100 billion. Seems like a lot of money until you realize that is just a fraction of what we have given to AIG, Citibank, and the GSE's. And for what? They are in the same parlous shape as before. Forget politics and economics; it is an injustice that our resources are being deployed in this manner. 

Huffington's piece shows where the true bi-partisanship in America lies. No one likes the endless bailouts except the bankers and their enablers in DC. Republicans and Independents have largely rejected the "stimulus" bill. But an impressive array of experts and laymen support nationalization followed by a winding down. Huffington correctly cites everyone from Paul Krugman on the left to Anna Schwartz and the W$J on the right with Nouriell Roubini and Niall Ferguson in between. These are not financial illiterates like Maxine Waters. Often, these were the voices that were predicting doom before the crash. I would rather listen to their prescriptions, rather than those of Obama, Geithner, Frank, and Dodd.

Everyone agrees that we need a banking system. But we don't need these banks and these bankers. Citibank, Merrill, and AIG seem to have cultures and balance sheets that are unreformable. If these banks must die so the rest of us may live, so be it.