eR, this post goes really well with this week's This American Life where Alex Blumberg and Adam Davidson discuss the Bad Bank. As this program says, the Mortgages on the bank's balance sheet are actually some of the simplest of their assets and doesn't even begin to show what's happening with the CDOs, CDO-squared, etc. It becomes very clear that we are in for world of hurt.
Posted by Mary at February 28, 2009 04:50 PMThe common shareholders of many big banks have been destroyed. What Treasury seems to be trying now is to save the debt holders (bond and preferred shareholders) who lent capital to the nation's largest financial firms.
If these debt holders lose everything, then you can forget any interest by investors in America's capital markets in future---to risky, one might as well invest in Russia or Estonia. We'll be destroyed as a place to put capital for generations, the losses will never be forgiven or forgotten.
That's what the Krugmans discount---the future of our capital/debt markets. Losing money on common shares is one thing---losing it on corporate debt, that's the end of you as an economy for good.
Posted by euzoius at March 1, 2009 06:43 AMMary,
Thanks...is there a link to the podcast available?
Euzoius,
Actually Krugman does not discount it - in fact his criticism is based on the fact that by ignoring what would happen to the banks' ability to service their debts, we will face a dismal future for capitalism. The invocation of the example of 1990s Japan is consistent with this. Pretending that the banks are adequately capitalized when they are not is a formula for failure. The point Krugman has been making is that if you therefore want to capitalize the banks using taxpayer funds, you ought to take ownership of the banks temporarily given their current condition.
Posted by eriposte at March 1, 2009 10:03 AMeR: It looks like the podcast will be available later. At least one piece that made up the show I heard on NPR earlier this week:
Taxpayer Beware: Bank Bailout Will Hurt
Posted by Mary at March 1, 2009 01:33 PM