Temperate Question

A spot of temperance in the holiday conviviality may be appropriate.

So what?

So, we have the following American phenomena that are indisputable.

1. Housing prices are in freefall. Disputes center on whether the decline will abate in late 2009 or sometime in 2010.

2. Through mismanagement, our money center banks have decapitalized themselves and are insolvent. Okay, this is slightly arguable, apologists would prefer to talk about perfect storms, risk management failures, bailouts, restructurings, etc. Fact of the matter, the banking system is not currently functional.

3. The general economy is, and has been for a year, in a recession. Thank you, NBER.

4. The pattern this recession will take is, at present, unknowable. Pretty clearly, the following are in serious trouble: anyone dependent on consumer spending, the real estate sector, the auto sector, any heavily leveraged organization. It's probably safe to assume that trouble in on its way for anyone whose principle customers fall into any of those catagories, and also for any public sector entity dependent on property or sales tax revenues.

How this will play out is anybody's guess. Typically, a stable banking sector would buffer the healthier parts of the economy from the troubled part. But, basically, the financial services sector is where the whole mess started (yes, subprime lending and a residential real estate bubble were the triggers, but a healthy financial services sector would have buffered the general economy from, rather than amplified and transmitted those problems to, the general economy.

We got a Christmas Card a few days ago wishing us a healthy and a happy 2009, and noting that a prosperous 2009 did not appear to be in the cards. I wish you the same.

Zombie Banks

Death to financial institutions!

The only justification for the extraordinary privileges enjoyed by lightly regulated banks, the extraordinary leverage available to essentially unregulated hedge funds and the mere existence of the so-called shadow banking system was that they served a greater social purpose than the personal enrichment of the participants.

It turns out that they do not.

So they should, collectively, exit the scene. Their corporate existence should be terminated. Whether the institutions are regulated out of existence, their activities are taxed to destruction or their leaders taken out and summarily shot is a matter of national taste, cultural and legal tradition.

Let's face it. Collectively, the major banks are zombies, as in, walking dead. Their problems simply overwhelm their capitalization, currently--and with any conceivable level of government support. One can argue specific cases, but there are also a couple of inarguable cases, starting with Citi.

You can't bring a zombie back to life. You can bury it.

And once buried, before the stench of the corpse has fouled the entire community, you can approach the next step of the dialectic. The resources currently being put at risk to salvage of the current system should be allocated with a strategy that will assure that, rather than being frittered away in a futile exercise, their placement will facilitate that next stage in the dialectic.