The Great Plan N Debate

Last night on Lehrer, The Kroog took on former FDIC Bill Isaac on the Plan N debate. Highlights:

KRUGMAN: And let me just say one important thing, that we do -- you know, we nationalize two banks a week. The Federal Deposit Insurance Corporation takes over temporarily two banks a week on average because of problems with the banks. This is not something that is qualitatively different from what we do all the time. It would be quantitatively different, because we don't take over trillion-dollar banks every week, but these are -- you know, this is something we do, do all the time.

Which is the point. The banks are insolvent. If they weren't insolvent, they wouldn't need hundreds of billions of dollars and trillions in loan guarantees. It's self-evident, guys. We're throwing more money at the banks than the banks themselves are worth. That means their asses are broke. On the other hand, we have people saying silly things like this, from former FDIC chairman Bill Issac:

ISAAC: And they're terribly complex. I don't know who would run them. I don't know who's going to buy them once the government decides to divest them. And they're definitely going to shrink, if they are nationalized. The markets won't support them.

And so you're talking about shrinking maybe two-thirds of the banking system in half? That's exactly the wrong medicine in the economy we're in today. We need our banks to grow; we need our banks to start lending money. And that's not going to happen if we nationalize them.

And the other thing, Judy, I would tell you is we're not going to be able to stop at a bank or two. The SEC is still not regulating the short-sellers, and they're going to attack one bank, until they score some kind of a victory and get the stock down to zero, and then they're going to attack the next one and the next one and the next one.

The banks won't grow if we nationalize them. They have lost 95%, 97%, 99% of their market value, but the fear is they won't grow if nationalized? They've taken terrible losses from bad, bad investments made with assets they didn't actually have.

He's right about the markets not supporting the banks however. When all is said and done, there will be a lot fewer banks out there in America and the world. A lot of the financial sector itself will have to go, and those jobs aren't coming back. Branches are going to close, banks are going to get swallowed up, assets sold to larger companies and debts...well now, that's the real problem, isn't it?

Somebody has to pay for these debts, trillions of dollars in deleveraging mess here. Somebody's picking up the tab for these bank debts. No matter who does, the debts are going to crush the economy.