This was an article I read from the Naked Capitalism blogs and I found it to be quite interesting. It was based on a joint statement (http://treasury.gov/press/releases/tg38.htm) released by the treasury, FDIC, OCC, OTS, and the Federal Reserve and discussed how the entire financial system is extremely important to the economic system in the U.S. and how this Capital Assistance Program will ensure that financial institutions will be provided with capital. Basically financial institutions have gained the attention of financial regulators and felt that they needed to reassure everyone how important it is to keep these institutions up and running. It argues how the U.S. needs a healthy banking system to run and to sustain growth, and it should remain in private hands in order to achieve that. But this is interesting considering that banks have always remained in private hands, but whenever they suffer through tough times as in this current crisis, they go running to the government and to the taxpayers for help. Here’s how that statement started off:
“A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery. The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments”.
Here’s where the argument for the sustainability of the financial sector is emphasized. Also as pointed out by Yves Smith, they acknowledge that they are in serious trouble but don’t suggest how the government “will ensure” that things will be ok or will at least be back to normal. It seems as if they are trying to make things appear like it’s going to get better, but what they’re really doing is just keeping their fingers crossed and hoping for the best. The statement goes on:
“We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment”.
Shouldn’t this have occurred before things went bad? So they just now decided to create such a program to ensure that these banks are appropriately capitalized (emphasis on appropriately)? Maybe things wouldn’t have turned out as bad if this was already in place.
“Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers”.
This is where things don’t make any sense. So the government will overcapitalize these banks on the caution of them occurring future loses instead of just giving them enough capital to cover current or near term loses? Wouldn’t that run the risk of giving these banks extra capital to say “fool” around with and maybe make mistakes that they have already made in the past. If you were to give them just the amount that they needed maybe they will be more careful of how they operate and invest it. The statement concludes with:
“Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands”.
As Yves Smith points out, this particular statement is comical in the sense that they HAVENT been managed properly and have put themselves in the mess that they are in now. I’m all for capitalism, but if these institutions are so adamant about being remained privatized then they should handle their operations with better and more responsible care and not run to the government and the taxpayers for help. I think it’s also important for the government to place some limited restrictions on these institutions that are receiving help, in terms of how they must use the extra funding and how they must handle their operations. The taxpayers shouldn’t have to bear the responsibility of these institutions and they also shouldn’t have to bear the governments poor decisions to overcapitalize and invest with taxpayer money.
