New Bank Prop-Up to Cause New Blow-Up?
February 4th, 2010 | 
Author: 
While many you have not even gotten to the ‘aftermath’ portion of the credit crisis, the federal government is busy not learning lessons with the benefit of hindsight. Obama’s plan to funnel $30 billion to “small banks” is exactly the sort of central economic planning that effectively caused the crisis.
As I’ve written before, given the state of affairs after the Lehman blow-up, massive government intervention was necessary. Both Geithner and Paulson are correct when the say a full run on the financial system would have yielded a far, far worse situation. Paulson, however, is the only guy I’ve heard so far to also emphasize the need to legislate new rules governing the next blow up. Everyone else remains focused on figure out how to get us back on track.
It’s the “back on track” bit currently at the center of the political frenzy. In politics, they all know that it’s almost always ‘the-economy-stupid’, and things aren’t looking so hot right now. Clearly, Obama (et. al.) had a wake-up call in the Massachusetts election. The 2010 midterms are around the corner, and if they have any hope of holding on in 2012, unemployment had better be falling…. at least in Florida, California and Illinois.
Presidential elections come down to key states - courtesy of the electoral collage system - and I couldn’t help but wonder where this $30 billion might land. A quick glance at the FDIC site shows, the number of bank failures by state. Because I care for you, dear reader, I pulled the data into excel and put out this little chart. Basically, GA, CA, IL and FL have the largest number (the “Other” category contains a sum of all states with less than 5). So, if you were in charge of getting Obama re-elected, and you had $30 billion to spend, how does this list look? Not bad, eh? Hell, Florida alone, might be worth the effort.
So, ignoring the politics, lets go back to the policy. Can anyone else remember one or two organizations started by congress in an effort to facilitate lending toward politically desirable demographics? I’ll give you a hint: you, the tax payer, own them and they both start with the letter F. Freddie and Fannie together guarantee over $5 trillion in mortgages. So, intent to facilitate lending has turned into a $5 trillion public liability.
Obama’s plan to directly fund small banks may be clever short term politics; and, it may even be good short term job creation in the markets most effected; but, it really could be the seeds of the next government induced credit blow-up.
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Posted in Economy, Politics/Government Programs | 
Tags: bank failure, bank failures, credit crisis, FDIC, financial system, Hank Paulson, job creation, Lehman, lending, mortgages, Obama, small banks, Tim Geithner, unemployment
The FDIC’s current bank receivership process has an important element that any bailout of small banks would lack: Bank Failure. Without the ability to throw out failed bank management teams, their boards of directors, and their equity investors, the the government will perpetuate bad practices, and the industry will lose its “survival of the fittest” process for natural selection. In the long run, this flaw may cost tax payers much more than the $30 billion touted as the price tag.