Friday, October 10, 2008
Banks need solvency more than liquidity
The $700 billion bailout is not calming markets and freeing up credit. What banks and other lending institutions urgently need, more than cleaner balance sheets, are fresh injections of capital. Solvency, not liquidity, is the paramount problem, as many critics of the bailout legislation have pointed out. But the bailout, as economist Nouriel Roubini points out, has language that's sweeping enough to let the U.S. Treasury recapitalize banks as well as buy up the "toxic" securities that helped trigger a financial crisis that's gone global. That's the route Britain has taken. The problem in the U.S. is that $700 billion may not be enough to do the job. It may take something like $1 trillion. But postive results are likely to come faster. There would be fallout, though -- an unknown number of banks would not be strong enough to merit recapitalization, and thereby go under. That could give giant-sized survivors a financial oligopoly when the crisis settles down.