July 18, 2011
Larry Summers wants Post readers to believe that the policy choices are either letting banks fail like Lehman, and setting off a financial earthquake, or keeping them alive through government bailouts. Actually, there is a third option. Governments can keep the banks alive but tell them that their world will end.
The principle here is so simple that even one of the world’s top economists should be able to understand it. Insolvent banks are kept alive by government welfare. Just as the government sets all sorts of conditions for getting monthly welfare checks (which average around $500), it can impose conditions on the banks that are on life support. This can mean giving large capital stakes to the government, voluntary haircuts for creditors (voluntary in the sense that they will get next to nothing if it goes bankrupt), and really really big paycuts for bank executives. This means no more multi-million dollar paychecks.
Congress pretended to impose some of these restrictions with the TARP, but everyone except Washington Post reporters knew at the time that the restrictions were a joke. The story as Summers and the Wall Street boys tell it is that we have no choice but to give the financial industry all of our money. This is not true.
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