New York Times Uses the N-Word

Steve Lohr at the Gray Lady takes up the N-word, advocating a Darwinian thinning of the herd, the 'nationalization' of the weakest banks.

Don't slice 'em up like sashimi. Serve 'em up like meatballs in a nice cream sauce with a side of lingonberries. What I mean is, restructure the insolvent banking system Swedish-style, avoiding the Japanese mistakes:

The Treasury program leans heavily on a sketchy public-private investment fund to buy up the troubled mortgage-backed securities held by the banks. Instead, the experts say, the government needs to plunge in, weed out the weakest banks, pour capital into the surviving banks and sell off the bad assets.

It is the basic blueprint that has proved successful, they say, in resolving major financial crises in recent years.

Japan endured a lost decade of economic stagnation in the 1990s before it adopted such measures from 2001 to 2003.

The Swedish government took tough steps in 1992 and Washington did so in 1987 to 1989 to overcome the savings and loan crisis.

“The historical record shows that you have to do it eventually,” said Adam S. Posen, a senior fellow at the Peterson Institute for International Economics. “Putting it off only brings more troubles and higher costs in the long run.”

Then Lohr quotes Dr. Doom, Nouriel Roubini:

Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, has been both pessimistic and prescient about the gathering credit problems. In a new report, Mr. Roubini estimates that total losses on loans by American financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, up from his previous estimate of $2 trillion.

Of the total, he calculates that American banks face half that risk, or $1.8 trillion, with the rest borne by other financial institutions in the United States and abroad.

“The United States banking system is effectively insolvent,” Mr. Roubini said.

Where's the Fantastic Four when you need them to beat back Dr. Doom?

Lohr performs his journalistic duty and offers up the opposing argument, before raising the spectre of mortgage-backed securities and their mysterious prices:

“Our analysis shows that the banks have varying degrees of solvency and does not reveal that any institution is insolvent,” said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, a trade group whose members include the largest banks.

Edward L. Yingling, president of the American Bankers Association, called claims of technical insolvency “speculation by people who have no specific knowledge of bank assets.”
...

Yet, as Mr. Posen and other economists note, there are crucial issues of timing and market psychology that surround the discussion of bank solvency. If one assumes that current conditions reflect a temporary panic, then the value of the banks’ distressed assets could well recover over time. If not, many banks may be permanently impaired.

“We won’t know what the losses are on these mortgage-backed securities, and we won’t until the housing market stabilizes,” said Richard Portes, an economist at the London Business School.

I guess I suggest you read the entire Times piece.