‘Painful and Quick’ Action
Add Tom Friedman to the very short list of commentators who: a) understand what just happened in — and to — the global financial system; and b) actually have some sort of coherent proposal about what to do about it.
According to Friedman, we have just witnessed a “nuclear financial explosion.” That’s what happens “when you take this much leverage and this much globalization and this much complexity and start it in America, and then blow it up.”
Friedman gets that, in the Internet age, it’s all about the network. You don’t save a damaged network by pouring resources into the parts that just malfunctioned. Instead, you bolster the parts that are still (relatively) strong:
Do a real analysis of what the major banks are worth in a worst-case scenario. Then determine, if, on that basis, they have viable, survivable equity-to-asset ratios.
Those that do should get more government investment. Those that are close should be forced to find new investors and merge. And those not viable should be shut down and have their bad assets bought by a government-owned body (which would sell them over time) and their deposits shifted to healthy banks to make those banks even healthier . . .
This process will be painful, but probably by the end of a year the market will clear, investors will come in, and the surviving banks will be ready to lend to each other and you and me . . . “
–“Cars, Kabul, and Banks”; The New York Times (12/14/08).
Just one year, albeit “excruciatingly painful”? Where do I sign up??