[Post Summary]Let my beloved come to his garden
—Song of Solomon
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CNBC's Larry Kudlow makes clear thinking so easy for any American sporting half a stem cell in the northern regions of his or her frame. Then again, the U.S. Constitution's Preamble packs more wisdom in a single sentence than Kudlow to date has spoken with his endless badgering of government.
During tonight's "Kudlow Report" Larry cast his [black] magic-of-the-market aspersions on the suggestion government should nationalize zombie banks currently crushing the financial system. He says this act would "send the wrong signal."
First, let me be clear. Bank nationalization is not a be all, end all solution to the mess we are in. Done right, nationalization would only be part of a solution addressing our decades-long investment deficit in physical economy. But for the signal it would send to future generations, though, nationalization could not be more right.
It is all about moral hazard, son — letting the captains of finance know you are not screwing around — so that subsequently these folks might manage their book more carefully. Indeed, next time true financial leaders might lift a finger and score a Ponzi scheme in the making.
Look, if I knew unregulated structured finance was an unsustainable scam (and I have for years), then surely the titans of finance likewise knew, too. Rather than participate, then, some of those concerned could have publicly cited the risk, even making disclosure to their firm's advantage. You wouldn't need a Congressional committee to accomplish this objective. A TV commercial would do.
"Does your bank risk your hard earned money in a casino game of musical chairs, hoping to add a fraction of a percent greater return on your earnings? Would you really hand your money over to Jimmy the loan shark on 5th and Main at a time when the five families were at war? Well, this is what you're doing when placing your capital at firms dealing in an alphabet soup of structured securities."
Bam! Just like that. The floodgates of cash line up at your door so fast you need to stay open until 10 p.m and all day Saturday.
Just like that honest financiers could have forced every competitor's hand. So, where were these folks? This I hope my readers in Congress will agree is among the first matters of fact investigative committees ought establish.
The threat of nationalization, then, would be something not only boards of directors would necessarily concern themselves with when it comes to making portfolio decisions. Indeed, stock and bond holders, too, would have a vested interest in gaining assurances institutions were not at risk of takeover by the government (in which instance their investment likely would stand to be frozen — at best — or at worst, entirely lost).
That's moral hazard.
So, returning to the present moment, why shouldn't the tax payer benefit from still functioning revenue streams as the price for rescuing zombie gamblers disguised as commercial bankers? Why shouldn't Uncle Sam have power to leverage these revenues for the sake of financing initiatives promoting the general Welfare? Yes, indeed, this is how a capitalized Third Bank of the United States — the credit agency facilitating, say, the build-out of the hydrogen-based economy — could instantly secure substantive backing. Once policy initiatives have been met and secure economic footing restored, then nationalized commercial banks could be spun back to the private sector.
How one rightly deals with stakes held by stock and bond holders, pre-nationalization, simply should put teeth in moral hazard, bringing practical significance to the need for due diligence. This, Mr. Kudlow, is how nationalization could send the right message, both to ourselves and our posterity.
—Tom Chechatka
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