The Vig

WSJ:

In the fall of 1907, it took J.P. Morgan just eight weeks to resolve a credit crisis similar to ours. Several years of buoyant growth and too much risk-taking in poorly understood investments led to needs for capital that could not be met. Morgan, then 70, locked the nation’s top bankers into the ornate library at his home for late-night confession sessions. He asked them to lay bare their balance sheets, keeping himself alert with endless Havana cigars.

The bankers reviewed one another’s assets and liabilities. Morgan then decided which financial institutions had to go and which would live, getting commitments from the survivors and from the U.S. Treasury for infusions of capital. This Panic of 1907 had rattled the New York Stock Exchange and the markets for gold and municipal bonds, ruined several banks and trust companies, and nearly bankrupted New York City. Share prices fell by half. But once Morgan was done knocking banking heads together, markets swiftly recovered.

And that’s how you solve a credit crisis. I was screaming about this six months ago. The problem here is banks know exactly how bad their own books look, so they can only imagine how everyone else’s books look too. If a JP Morgan, or a Henry Paulson, were to bring everyone into a room and force them to bare their souls, this thing could be solved pretty quickly and without $750 billion of taxpayers money.  Unfortunately I think current regulations probably forbid this type of solution, which sucks.  Instead Congress and the administration will continue to threaten and obfuscate.  I guess GWB is even going back on the tee vee in the morning to try and talk us into this deal again.  Watch him talk for 20 minutes without really saying anything.  Again.

I’m truly torn on this bill.  While I’m resigned to it eventually passing in some form and think it will probably accomplish what’s intended, I’m definitely rooting against it.  It’s putting off the reckoning.  I’ll be calling Representative Baird in the morning to voice my displeasure at his having voted for it.  Rather than drag this thing out another year or 18-months, we need to take the hit now.  While I don’t think we’re necessarily prepared for it, I think we’re willing to take it.  An interesting dynamic, to be sure.