WSJ’s Evan Newmark critiques colleague Dennis Berman’s latest column in which he offers a cure for financial mistrust — create new banks. Evan tells him why he has a problem with that plan.
11/25/2008
"My formula for success is rise early, work late and strike oil." —John Paul Getty
Consumer Credit outstanding fell $14.8b in Sept seasonally adjusted, almost $5b more than expected and marks the 11th month in the past 12 of declines. At $2.456T outstanding, it is 4.9% below the record high in July '08. After a flat reading in Aug, (didn't fall b/c of the CARS program), non revolving debt outstanding fell by $4.9B. Revolving (mostly credit cards) balances outstanding fell by $9.9B. To fully put into perspective today's data, look at the current level of consumer credit (doesn't include mortgages, the biggest chunk of consumer credit) relative to GDP. As of Q3, it totaled 17.2%...
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November 29th, 2008 at 12:44 pm
Evan has a problem with it because he realizes that Dennis is right, and that WHEN (not if) new clean privately-owned banks are started, they will have a huge competitive advantage (no bad paper, no over-priced real estate assets, will lend with limited leverage, can charge high rates and offer depositors safety and interest above that of its wounded competitors).
Where can I buy my shares in CLEANBANK? This is such a great opportunity you can expect the financial establishment to fight any newcomers tooth and nail.
I think the short squeeze in banks and CRE has run its course. Citi is about to find out there were really no buyers. Just sellers covering.
November 29th, 2008 at 1:28 pm
I have favored the creation of new banks for awhile. It’s the quickest way to restore confidence in the banking system (although there would certainly be a volatile transition period). Most estimates I have seen do not have credit fully recovering for 3 or 4 more years. Evan is correct in that you don’t want to create more Fannies and Freddies, but that’s easy enough to avoid. The government could simply match investors equity and give up ownership in return for putting these new banks under stricter (and perhaps temporary) regulations that will keep them safe while the other banks fail.
I do think this would be a great time to start new, clean banks, except that the government keeps investing in the old banks. There’s less incentive to start new banks when the government is propping up your competition. The government is simply prolonging the recovery period with its current strategy.
November 30th, 2008 at 6:53 pm
I’m all for new banks. Proven incompetence (at best) is not a convincing argument to keep the old banks.