As recently as last month, the Treasury was saying the banking system was more than adequately capitalized. It’s the fear of future loss that’s keeping a lid on lending, not necessarily current levels of capital adequacy. If it was strictly a matter of boosting bank capital, then why didn’t the original TARP program put a dent in the problem? The banks remain risk averse — they simply took TARP funds and invested in Tresuries.

According to my understanding of Fisher, the solution should be to restructure/eliminate the bad and nonperforming assets,putting a floor under asset deflation. This then sets the stage for reflation which restores confidence and the willingness to lend.

The idea of “bailing” out banks is to prevent a massive contraction in the money supply and a 1930s style economic depression.

all i can think is that when they talk about getting credit flowing they mean to bad risks and likely defaulters.

here in AZ prices on houses still way too high, long way to go yet short a ‘miracle’

This was a crisis growing organically on a global scale independently of what the U.S. did or did not do.

Vinny Goldberg

It does however not seem that we will be running out of topics anytime soon.

Interesting take. I hope you don’t mind but I cited you in a letter to William Greider (The Nation) with the main points of your post in hopes of eliciting his opinion.

If so, then let’s put the top exec bastards at all these firms on GS-level pay. I say the top end should be GS-13. It is FAR more equitable to pay them GS wages as opposed to Robber Baron/Marie Antoinette compensation…though they DO deserve the Antoinette ending.

Clearly if they don’t have enough capital they are forced by regulations to reduce their lending. But there is no evidence that every bank in the US is under capitalized so why are those that not picking up the slack and taking this opportunity of making “good loans”. Is it possible because nobody knows anymore what a “good loan” is. But owning or not owning a toxic asset has nothing to do with establishing that knowledge. It raises the more important question of why we are trying to rehabilitate the banks with Toxic assets rather than pump up those without them through injections of cheap capital.(including chartering brand new banks)

Secondly, sufficient capital is not a universal constant. It is something that regulators came up with- and what they gave they can change. I find it particularly insane that a bank needs to have the same level of regulatory capital before and after they have taken a large write off. Either they were under capitalized prior to write off or they are over capitalized after it.

In other words the Toxic assets are an issue only if you are trying to preserve the previous financial structure. It has nothing to do with the needs of the economy.