Save Free Enterprise

Take over the Bank of America.

As readers may know Wonks Anonymous is a big fan of public investment and public programs to foster savings. See for example this post. His basic argument is this: Private sector borrowers are reluctant to take on debt given their depleted assets. Banks are panicked and unwilling to loan and, besides, they can make a fine profit charging us exorbitant fees for financial services and high interest rates for the small amounts of credit that they do make available. Since they get the money at zero interest from the Fed or the Treasury the spread is fantastic.

If the private sector is not borrowing and investing the government has to.

But really this an incomplete solution. There are small and medium sized businesses out there with plans and ideas that could lead to products and employment and we really need all of the creativity that we can get. The best way to extend credit to these folks is through local banks that hold and service their own loans.

Unfortunately these banks have all but vanished in the wave of bank mergers of the past decades. Instead we have giant banks/securities firms that specialize in making loans and then escaping any responsibility.

One of the biggest of these, Bank of America, is having problems with its stress test. Because it is "too big to fail" we will probably wind up giving it fresh cash in return for more worthless assets. Why not take over the Bank of American and dissolve it into smaller regional and local banks? We don't want to be in the banking business but we need to do this for about a year to restructure the banking business.

The employees are there, the banks are there, they can even use the financial information and transactions networks of the mega bank to provide their depositors with national financial services.

They can also make fundamental changes in their attitudes and behavior: They can lend locally to people who they know which will allow them to take chances that computer models would not allow. They can hold their own loans which will give them the incentive to make good loans and make sure they are paid off. They can compete for deposits which might actually get us some real returns on private savings accounts at some future time.

Ultimately we get functional private credit markets and a flow of savings to small private investors. Or we could just continue to pay tribute to the megabanks and give them government money whenever they felt insecure.

 

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