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Sunday, February 22, 2009

"Improve What Bank Plan?

Jamie Galbraith wonders why the standard, mandated procedure for handling failing banks isn't being used on large banks such as Citigroup or Bank of America

How To Improve The New Bank Rescue Plan?, by James K. Galbraith, National Journal: Improve what bank plan?

There are laws on these matters.  Let me first refer you to William K. Black...:

Whatever happened to the law  (Title 12, Sec. 1831o) mandating that banking regulators take ‘prompt corrective action' to resolve any troubled bank?  The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them).  The law does not provide that the taxpayers are to bail out troubled banks.

There is no exception in this law for Citigroup or Bank of America.  If the bank is troubled, the regulators need to be on the case.  If the bank is not troubled, then why are we talking about a a bad asset rescue fund of two trillion dollars?

The administration should follow the law.  Pass-through receiverships are the legal way to resolve troubled or failed banks. They are also the proven way.  ... There is no coherent reason to avoid the proven path, in favor of the wild experiment.  And particularly not, when the law is very clear. ... [Note: Jamie also discusses the Ed Leamer plan later in his post]

The point about this not being the time to experiment is similar to the conclusion I came to here in a discussion of Ricardo Caballero's plan to end the crisis by having the government guarantee the future price of bank shares.

    Posted by on Sunday, February 22, 2009 at 11:25 AM in Economics, Financial System, Policy | Permalink  TrackBack (0)  Comments (14)


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