Zombie Banks Are Devouring Our Public Money with No End in Sight

By Bill Moyers, Bill Moyers Journal. Posted March 4, 2009.

Moyers: The capital assistance program. That is?

Johnson: That's the bailout, the drip intravenous capital injections.

Moyers: For which he's asking, in his budget this week, for another $750 billion.

Johnson: That's right. And I do think, perhaps, the reason they went with the intravenous program, is they were fearful, given the way the well was poisoned by Henry Paulson's TARP plan, that Congress won't give him any more money. But they're foreshadowing that the scope of the problem is enormous.

Perhaps the only difference between Secretary Geithner and myself might be that he knew after negotiations, he couldn't get all the money he needed. So he has to go on the drip until he builds a consensus, and then can do the more profound restructuring.

Moyers: And you're saying that the drip is too slow, too risky, too dangerous, and that what we need is immediate surgery?

Johnson: Well, I guess if the heart of the economy are the four or five major banks, you do need a transplant.

Moyers: And so the government would step in and do what?

Johnson: I would ask for letters of resignation from the top executives of all the major banks. I would not do a case by case restructuring. I would take the largest group all in and say, "I want everybody's letter for resignation."

You might not honor all those letters, but you'd have them. I would then say, "The stock is worth zero. The balance sheet is too far negative to continue risking the taxpayer's money." The examiners, somewhat like FDR did in a bank holiday, would examine the depth of the hole in those balance sheets.

Fill that hole with money, taxpayer's money, to recapitalize. Send them back out into the marketplace where people know they're wholly capitalized. And last thing I would do is I would separate the toxic assets from the bank that you put back in the marketplace.

So everybody knew the resulting creature was sound and confidence could rebuild. Inner bank credit could start to flow again, 'cause they aren't afraid of each other.

Johnson: But the question is would that resulting system of financial institutions, separated from the bad assets, recapitalized for the medium term, create new credit flows?

Give people confidence that there was fair play. That the economy and the financial system, I would say, was subject to the same discipline as the rest of us. There's an old saying about you don't ever want to walk under a guillotine, but after the blade falls, you can walk over it. Well after the blade falls people just start walking forward again. But they don't want to be walking under it.

Moyers: You're saying that the blade should fall, on the management of these banks, and the shareholders who went along with this excessive risk taking, because they wanted the big returns. The blade should fall on them. Get them out of the way. Government restructures. And then offers the banks back into the market and new investors come in.

Johnson: That's correct.

Moyers: So the people pay the price who bet wrong, right?

Johnson: That's correct. I think that's very fair. I think that's how markets are constructed.

Moyers: And what happened to the markets over these last 25 years. They created a lot of wealth for a few people, relatively, and then passed enormous losses onto the public.

Johnson: Yes. We had a very, very false vision of the sufficiency of markets left unfettered. When, in fact, the financial sector, as we now know, can spill over.

This is a fascinating dimension. Financiers used to say, with all of their academic consultants, and everything else, "You can leave us alone, and we'll create flexibility and prosperity. Trust us." And then, when they got in trouble, they say, "You have to bail us out, because if you don't, your hostage in society goes down with us." Which is kind of what's happening right now.

We had 25 years of excessive risk taking with people like Alan Greenspan and everybody else underwriting by rescuing each crisis. Robert Rubin and Larry Summers rescuing from the Mexican crisis, the Long-Term Capital Management deal, which didn't involve taxpayers' money but it involved public officials organizing it. But you kept anaesthetizing the fear of loss on the part of financiers, and they built the bubble bigger and bigger and bigger. And now they need the bailout. We made a mess of regulation in the old days because we acted like they would never do something that took excessive risk. And they did do things that took excessive risk.

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Bill Moyers is the host of Bill Moyers Journal.

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