Lead by Example

Government is asking banks to start lending. Some so-called economists are lining up on news shows to throw up solutions. These include letting the banks fail. They also include nationalizing the financial industry. Well how about a win-win hybrid solution? (to use a trendy green term).

Let’s first agree that to fix the economy we need healthy banks that are motivated by Capitalism 101: profits. We cannot let the entire banking industry fail but at the same time we do not want to nationalize which goes against basic principles of capitalism and free-markets. Now that we established this objective, let us understand the root of the problem: Credit is limited because banks are still carrying over a trillion dollars of toxic assets. Hence just hoping that the issue would resolve itself over time will only yield an extremely slow recovery.

We acknowledge the uncertainty lays in the difference between the hold-to-maturity and the mark-to-market values. So what should be done to help free banks from their shackles and allow them to venture again into lending land? What if the government set its own prices to invest in these toxic assets and became a shareholder in the banks? Keep in mind that profitability could be the outcome of a long-term hold, something that only the government seems to be able to afford nowadays.

In simple terms, the best way to save a financially-strapped but sound organization is usually achieved by injecting capital in it and relieving it from bad debt, while taking an equity share and in some cases helping management with the turnaround. This is usually a win-win situation and a far better solution than letting the business fail or acquiring the entire company and replacing the management team (especially if the buyer is not an expert in that field).

Let us hope Democrats and Republicans can work together instead of bickering and sweating the small detail. We cannot afford wasting additional time while the Barbarians are at the gates. The right solution will need to strike a balance and a trade-off between government bureaucracy and capitalistic greed.