Today's Daily Angle comes from Wikinvest Wire member Edward Harrison of CreditWritedowns.com. You can read the full article on Edward's blog. Credit Writedowns has made it clear how little will there is in Washington for substantive reform in financial services. But, let's be more explicit in this post about what policy makers are doing. I will use the recent Citigroup TARPbrouhaha and changes to the implementation timetable of accounting rules as the vehicle for this discussion. The conventional wisdom about what is wrong Here is what I believe is the conventional wisdom in Washington, as voiced in my April post Channeling my inner Larry Summers in mock-Summers first person: - Ultimately, the jump start from stimulus and quantitative easing will start to kick in while all of this is ongoing. The result will be a growing economy and healthier banks. Nevertheless, we should implement some stress tests on institutions to gauge how much capital each institution would need in a worst-case scenario. Those banks faring poorest will need to take remedial action as soon as possible. However, under no circumstances should we ever imply that any individual institution is insolvent. This creates doubt and during times of stress it is not the wisdom of crowds, but the panic of crowds that is on display. Doubts about one institution are likely to have knock-on effects for others creating a systemic problem. This must be avoided at all costs.
- Obviously, if these plans do not work out because the economy declines more than expected, we can always fall back to the more coercive, interventionist mode of nationalization. However, that is Plan B only – measures to be taken only if necessary.
- I am confident these plans will work. We are already seeing some faint signs of recovery. Mind you, unemployment will continue to rise at a devastating clip. But, by the second half of 2009, we should see some many more signs of recovery and with all of these plans in place, the liquidity crisis will be recede into the past.
All actions by policy makers in the U.S. banking system stem from the views implicit or explicit in these paragraphs, namely: - The banking system is at the heart of our economy and large financial institutions are more important to the U.S. economy and our standing as a financial center than small institutions.
- The status quo is not all bad. On the other hand, fundamental change is destabilizing, while incremental change is good.
- We experienced what was mostly a liquidity crisis in finance; The U.S. banking system is fundamentally sound.
- Government ownership and banks don't mix.
- Monetary and economic stimulus will be effective in the medium- and long-term, especially if asset prices stabilize.
- Time is our friend; buying time recapitalizes banking through the back door.
So, the goal has been to end the banking system liquidity crisis first, right the economy again, and, once things are well in-hand, implement major tweaks to our regulatory system to prevent a repeat of this crisis. While this seems a reasonable strategy, it falls well short of what is necessary because it is predicated on flawed ideas. But, before I get into those flaws, let me point out how these ideas manifest themselves in policy on Citi and on accounting. Click here to continue reading this article on the CreditWriteDowns Blog… | 
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