The Finishing Blow, Nationalize Banks

The federal government is just not going to admit any guilt in this current economic down turn. Instead, the want to nationalize banks. The troubles with our economy go back a long way. For Instance the Long Term Capital Management fund. As Roger Lowenstein points out, the crisis can’t be fixed. The houses are worth what they are worth and the banks owe what they owe.

A simple examination of the facts will show why this bailout and nationalization should not happen. Let’s say a bank has 20,000 bad loans that have gone into forclosure. The average house price was 200,000 dollars. That is 4 billion dollars in bad loans. Lets assume the issue is the bank actually borrowed the money because it didn’t have the money. Well the bank owes 4 billion but it has the houses. Problem is, the houses have dropped 20% in price. Now they owe 4 billion but only have 3.2 billion in assets. If the bank defaults then the lender of the 4 billion has 3.2 billion in houses and we have a bank that went out of business. Now the stupid part. The feds lend the bank 4 billion to pay back the loan. The bank decides to make minimum loan payments and sells the houses, mean while they loan out portions of the 4 billion to new home owners while making the minimum payments. So instead of an institution taking an 800 million dollar loss, we pony up 4 billion to make sure all those people get paid and give the culprit more of our cash to lend out or do as they wish. No where in there is the problem solved, everywhere in there is a chance the money will be used to save the culprit and make him rich and no where in there do we actually get paid back.

Now we get to nationalization. The government, who is not famous for running things well, takes over the bank. Lends itself the 4 billion. It also buys an interest and controls the lending institute that lent the 4 billion to the bad bank. It writes off the 4 billion to the lending institute, it keeps the billion it gives the bank, it sells the houses and keeps the profit and does what it wishes with the 4 billion. If I’m wrong, please tell me where we have a single rule that would stop this from happening. My expectation is that you will see the CEO’s of these government run banks, expemted from the government pay scale and you will see graft and corruption that would have made Al Capone blush.