Friday, September 26, 2008

"The Adults in the Room"

Today's Wall Street Journal headlines the largest banking failure in US history:
In what is by far the largest bank failure in U.S. history, federal regulators seized Washington Mutual Inc. and struck a deal to sell the bulk of its operations to J.P. Morgan Chase & Co.

The collapse of the Seattle thrift, which was triggered by a wave of deposit withdrawals, marks a new low point in the country's financial crisis.
Here's the most important paragraph, though:
the fact that no bank was willing to buy WaMu until it failed shows how badly confidence has eroded in a banking system awash with record profits just a few years ago. Faced with deepening losses on mortgages, credit cards and other loans, big and small banks across the country are struggling with what many bank executives say is a crisis far deeper than the savings-and-loan debacle.
Although he veers a little into the lunacy that has gained him some readers he shouldn't covet and lost him some he should, Paul Krugman asks the right question - Where are the grownups?

His answer, though, that they're to be found in Congress, is fairly laughable (see yesterday's post for one example).  Further, some of his criticisms are part of the "bad Paul" (the NY Times political columnist) rather than the "good Paul" (the Princeton economics professor).

Meanwhile, House Republicans are pushing an alternative approach.  Rather than having the government purchase the bad investments from banks, they would prefer an alternative where the banks would buy insurance from the government for the debt.  

I'm not entirely clear on the details of this proposal and it doesn't sound like it would address the problem of banks having too little equity to debt to continue to lend.  However, the Journal reports only 30-40 House Republicans will support the proposal on the table between the Administration and Senate Democrats.

House Republicans, however, are in the minority.  Democrats control both chambers of Congress.  They are afraid, however, that the public will blame them for their costs of the bailout and are unwilling to proceed without strong Republican support, even though it's not need for passage.

In short, Krugman's "adults in the room" are playing CYA, big time.

Will WaMu's failure change the dynamic and get what looks to be a good compromise between Senate Democrats and the Treasury back on track?

Stay tuned.

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