Why Are Banks Still Failing? What Should the Government Do?

Dear Friends,

This Fox Business News Interview with Peter Cohan is worth watching. Already 52 banks have been seized by the FDIC (Federal Depository Insurance Corporation), i.e. the Government Body that guarantees depositors. The Interviewer states that another 7 more banks failed over the weekend, and thus, the total is now 59 banks.

Why are the banks still failing? Peter Cohan offers the explanation of Hot Money causing the problem, due to incentives for brokers to bring in the funds into the banks, irrespective of whether the banks have a safe way to utilize the funds brought in at a high interest rate of more than 5%.

More importantly, the Interviewee asked the question as to why there is a discrepancy between the views of Business People compared to the Government People. All the Business People he has interviewed seem to think that there is a need to curb excesses, and people just have to be sensible with their spending, and therefore, some painful adjustments are necessary.

However, all the Government People he has interviewed are for more Government effort to encourage spending.

Who is right, and who is wrong?

I suppose it depends on who you are asking. For the people who are caught, they want Government help. For the Government People, not to help is to lose votes. To the Businessmen, they tend to take a longer term view of things, and possibly the strategically appropriate action that will put strong fundamentals back into the country's and the people's finances, even though, this means a tough time for the businesses.

Personally, I think that the Consumer Spending Excesses of the past few years, is just way too much for the US Government to solve today. And to throw money at the problem will alleviate some pain, but not only prolong the problem, but also exarcebate the problem eventually.

The unwillingness to amputate the arm infected with Gangrene, will mean the eventual ending up in Intensive Care, with greater loss than just the arm. How? Possibly in the form of US Dollar Devaluation, Higher Interest Rates, and a greater collapse in the US Economy and Banking System than would have been the case, had the losses been accepted.

However, if you are the President of US, you can't just roll over and die, and tell the American People to just take the pain, can you?

All this stems from the illusion that a Government can manage the booms and busts of an economy. A Government can certainly take some proactive measures to alleviate the pain, and even spur growth in a normal recession, but not one where there is a financial system crisis of massive proportions, with industry losses way beyond its financial means. To fight the free market forces, is to risk an even greater disaster.

Best wishes,

Ooi

Courtesy of Fox Business News, video clip entitled, "Why are Banks Still Failing?"