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this plan does not advocate "destroying" the banking system. It advocates seeding new instituions to take up the economic role of the banks (since they are refusing to do it). The credit default swaps can be attempted to be cleared in government-run clearing house. The bottom line is that if the current banks survive but never lend (like Japan) we are in for a LONG crisis (see my appearance on CNN and the attached paper for more information).
The culprits in this whole recession are the rating agencies. They are the only companies that haven't felt the brunt of recession and have profited. They haven't done their jobs correctly. Regulating these rating agencies would be a better choice to avoid these disasters in future.
Great idea Sal! I say Sal you should get this bank started. I sent this video to Congressman Wexler, lol. I hope he gets this talked about before Congress votes on the new bailout law.
"If I wanted to lend money to someone who was going to go under next week I would want at least 12-15%. That's what people were originally paying in the early eighties and they weren't talking about 'financial armageddon' back then." Hah! Couldn't say it better myself. Sal can I please elect you to secretary of the fed? I think we need someone with fresh thinking who doesn't want to rescue all of their buddies in the finacial sector.
Oh for goodness sake Mr. Kahn. Creating new banks is a GREAT idea. Issuing shares is simply setting up the same failure all over again. Once you make banks businessess with share holders you need PROFIT = RISK. I suggest we need a place for Mums and Dads to put their money RISK FREE. I suggest that this can not be done in a for profit banking system. Yes, that means no interest payments. Yes that means no Growth. awesome work. Stewart, Brisbane.
Hi Sal.. I personally thinks that your proposal is a good idea. However, in terms or real implementation it is a bit unrealistic. My reason: 1. Opening a new bank might incur a huge start up cost. Besides it will be a long time lag since its inception until full operation as the new banks needs to acquire capital. 2. Most importantly, what differentiate us to the Chinese banking system then? When Banking are only used as a tool to pass the money to the public. p.s: i really enjoy your video!
How would you combat inflation to ensure the value of your savings was not being constantly eroded? There is a certain minimum natural level of inflation which is entrenched in the economy - this you cannot get rid of.
Your idea has many appealing aspects. But I don't think our government can use the $700B for new banks "instead" of for the existing failing banks. The deposits in the existing banks are insured by FDIC and the feds will need to finance this. So our government would end up financing the existing bank shortfalls AND financing new banks?
Yes, but those banks in Canada for instance are as guilty for trusting these toxic assets filled banks with their money. And all these countries have to do is apply the same solution home. This is a form of social credit. People would get dividends from it.
The mortgage interest tax credit could be doubled for only about 660B/yr. That would have prevented us from having to bail out the banks and brought them a lot of new business in the form of the 1/3 of homeowners that have no mortgage. That credit could be phased out entirely over a long period leaving a more equitable tax code and lower home prices. Letting the banks crash would harm lots of ordinary people via their 401Ks etc.
This plan would lead to bankruptcy of many banks. Savings and pensions (since pension funds are invested in those banks) would be wiped out or would at least lose a big portion of their value (since they are FDIC insured). This would not only hit the wall street (which would be ok, but also the main street). However, this would be a better solution in the long run, but very painful for everybody in the short run.
The real thing Sal is forgetting is that 'too big to fail' really means that certain shareholders of certain banks are too important to lose their investments. If the Sal/Todd plan were put into effect, many of the existing financial institutions would go belly up. But who are the shareholders--Saudi princes, congressmen, senators, etc. This is the sad reason Sal/Todd's plan will never see the light of day.
Most of us don't know what the 'financial crisis' announced really is. What data did Paulson use in his assessment? I think this subject alone is worth of a series of videos. Second, is it really a 'credit crunch'? Seems doubtful to me, but I'd like to see the data for/against. Japan has just announced a 27% drop in exports. Bad things are happening for sure. So far you've done a GREAT job, but I think you have just scratched the surface. Now is not the time to rest on your laurels.
Part of the issue that I think this solution neglects is that the systemic risk is global. Remember the hit financial markets around the world took after Lehman Bros collapsed? These Wall Street banks are in huge debt to banks around the world
Wrong problem. Mortgage foreclosures and illiquidity are only incidental to the problem. The problem is that nobody can valuate the MBS, so trillions of $ remain frozen. I would get the SEC a new IT system and standardize a securities registrtion database. All underwriters of MBS would be required to supply the underlying mortgage status/info to the SEC who would then tabulate and make this information public. Investors could valuate the MBS and trade them on the open market for liquidity.
It's just an idea people. We will never know whether this would have worked better than what we used. We will never know if giving the money to the population would have either (people forget that we tried that with the stimulus checks). Economics is not an exact science so we can sit here and make accusations but the truth is no one can be sure what is best.
"This is their book equity; this is what they say is the book value of their assets." OOPS! Equity = assets - liabilities. Remember equity, the little rectangle on the lower left? It's a lot smaller than assets. The amount of nominal asset value that could be destroyed if the crisis relapses and goes to completion would be an order of magnitude greater. So would the real asset value destroyed in the course of liquidation as productive going concerns are replaced with scrap and salvage.
Let them fail. Go into bankruptcy. With the caveat, that the new banks are forbidden by law to invest in such gee-whiz vehicles as magic-swaps. I love the idea.
LOL they actually did do something similar to this, except using the existing banks (gov bought much of citibank). Most banks have now paid back the tarp but unfortunately have NOT loaned the money for investment. They still like trading their derivatives and black pools too much. That is also why we will not get much financial re regulation that we need so badly. Banks still have too much power. Power to steal everyones hard earned pension money.
What about all national governments printing money that pays off 90% of their debts. This would cause inflation for a while but then we could all do a China and deficit spend for another 10 years creating massive production. We could throw loads of neoliberal sustainability projects in there too.
@khanacademy: Do you think that the US government would still have a AAA rating if they did this instead of absorbing hundreds of billions of dollars in bad assets?
You want to create more private banks that will eventually fail? Why aren't you addressing the issues that caused the collapse? It seems like you just want to start the game over again.
Epic fail compared to your initial statements. If the government was capable of intelligent investing, we wouldn't need a free market! Don't steal my money and turn around say, "Here it is back, I've wisely invested it for you". Let those businesses who are failures fail.
I think the flaw in your (Todd's) plan is that most borrowers (considering what happened) would not qualify for prudently considred loans. Better idea. US government creates new bank that will provide long erm, low inter loans to homeowners to pay off the toxic loans. It helps but does not totally bail out the banks and helps the homeowneres, who got lost in the shuffle as it turns out.
My God! Make a video with text that cannot be read? And Bill Gates and Google give you money? Grade school kids would be made to do it over by their teacher!
