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By the bank sword

Is it that easy to say "let them fail?" Republican Senators Richard Shelby and John McCain said it yesterday on national TV. But saying it and doing it are two very different things.

Shelby didn't point out specific banks but said, "We bury the small banks. We've got to bury some big ones and send a strong message to the market." When asked about Citigroup, he said "Citi's always been a problem child."

Problem child? Let's face it, Citigroup is Damien. What's the last scene in The Omen? Damien is holding the President's hand, giving a sinister smile. I think that about sums it up.

But as tempting as it is, I just can't say it. I can't say "let Citigroup fail." I'll admit it -- I'm afraid of the consequences.

University of Maryland economist Peter Morici made a compelling argument on the Marketplace Morning Report. He said letting Citi fail would be absurd -- 8% percent of the population would suddenly be without a bank. The FDIC would go bust. Not to mention the ripple effect for banks around the world. You can listen to what Morici said here:

Still, Morici doesn't like the current policy of dripping money into the banks. He wants to create a "bad bank" and sweep the toxic assets off their books. He says unless we do that, we'll just have to continue the bank life support system indefinitely.

Doug McIntyre at 24/7 Wall Street points out the same thing about AIG. He says AIG is an "illustration of the sword that every major financial firm in the US holds" and:

"Given the trillions of dollars that would be required to make the largest banks around the world whole with one set of investments by central banks, the need for financial life support as a prophylactic could last for years."

That's no way to live.

So, beyond the "bad bank," we'll also have to break up these companies. They became too big for anyone's good, and they should never be allowed to hold their swords against our necks ever again.

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The loan modifications of existing home mortgages that the government is encouraging is really not helping most homeowners but it is definitely helping banks/servicers/investors of these loans and turning homeowners into slaves of their homes more than ever before. Homeowners are slaving away, cutting all other expenses, reducing their disposable income, just in order to meet the mortgage payments they can ill afford. It could be wiser to have them confront reality, move out and rent a home/apartment for half the cost of owning, and use the disposable income to save for a downpayment of a future purchase, reduce stress and anxiety and even spend it if they choose to. The latter, of course, would help the economy a lot more than giving the money to the lenders! But then again, all these homeowners would have screamed if the lender had refused to extend credit to them when they were purchasing the home. We've become such cry-babies that we are unwilling to take responsibility for our actions, or inactions, and yet we demand so much from businesses and the government. We make fun of the French expecting protectionism from their governement and yet we are far exceeding them. There is not enough space here to address all the flip side perspectives that the major media is not addressing. That's why I guess it is called "Mass" media because they give the masses what they want to hear! What happened to telling it is as it is? What happened to telling the truth? Are we that weak that we can't face up to the truth?
I think we can. The more people are willing to accept the truth and live with the consequences, the sooner we'll get out of the mess we are in. But that's just one opinion.

Senator Shelby's comment was irresponsible, perhaps intended to make the Administrator's job even tougher. Who will distinguish between solvent banks which should be closed and those which should not? And what, exactly, is the definition of a toxic asset? If we knew that, we could calculate how much bad loans would have to be offloaded to a "bad bank."
Professor Martin Spechler (Economics)
Indiana University

Good question, Martin. Citigroup just said it's doing its own "stress tests," and they are based on more pessimistic outlooks than the government's stress test, according to Citi. So who gets to decide?

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