Everyone knows that trust has been holed below the waterline. In any case, concerns about adequate capitalisation are hardly irrelevant to whatever trust might still exist.

I’ll say one thing for him; he’s a brave man. To confidently assert that capital isn’t a problem is a big call. Even if his overall loss estimate turns out to be correct, so what? Nobody knows right now, nobody can know and real world indicators are still pointing down. That uncertainty is just part of what the markets are trying to discount, and the $700 billion he’s convinced will pour out of the US financial system in positive cash flow over the next two years is, so far as the market is concerned right now, more akin to a hopeful maybe. In troubled times, I don’t really think this takes the place of equity.

His bottom line, in any case, is nationalisation. The point he’s so eager to make is that this would work not because it injects equity but because it would inject confidence. A semantic quibble, in my view. It would work (assuming of course it does) because the system would be guaranteed by those who control money creation. One might just as well say that the entire equity of the American taxpayer would have been committed to the system’s survival.

Because on the analysis of eg NG’s latest favourite pundit, LIBOR is high really only because banks aren’t using it anymore and because this is a de facto subsidy for banks. Which sounds a bit like cheating to me.

Patrick, I’m much less sure about the other aspects of the package. Like you, I can’t see that direct government interference in lending decisions is a good idea. I also wonder about the merits of issuing wholesale guarantees of interbank lending. Not only is it likely to generate all manner of unintended consequences but removing this prop may not be easy.

This also seemed to be the worst part because government-inspired lending sounds oddly like what got us into all this!

I certainly agree that the recapitalisation method seems very elegant.

JC, what do you mean by ‘being created’? First, almost the whole OECD does this. Secondly, it is strongly arguable that this was always implicit and they have merely made it explicit - like the US and the GSEs. I imagine you agree that explicit is better than implicit in the case of government guarantees, because the implicit ones are always denied until called!

Let’s hope the bank recaps don’t end up like this.

http://www.break.com/index/clumsy-best-man-knocks-bride-into-pool.html

At least I’ll premise that by saying that I’m not sure the equity will be enough to cover the losses.

So the question than becomes will the equity be enough to cover the write downs and losses?

And how about the newest moral hazard being created by the Aussie government insuring all deposits… bi-partisan by the sounds of things.

BBB

Its just that I have not seen mention of the lack of balance between reward and risk - either in the media or in the blogosphere - yet there is much discussion of ‘confidence’.

This has annoyed me because I cannot understand a more important contributor to ‘confidence’ than knowing that if a company goes down, that those who made the poor decisions didn’t get paid.

For a start, you might see fewer ‘chainsaw’ execs and more interested in historical curiosities like training and research.

I for one share your view that the balance between risk and reward for public company managers has been lamentably out of line for a long time. And that these distorted incentive structures have played a significant part in the current debacle. Quite what the best solution to this dilemma might be is a larger topic than I care to try to take on here.

Still, having said that, I don’t see how it follows that other topics (like the need to recapitalise the financial system) aren’t also worthy of comment and analysis.

Why do I not think this idea is anything more than a pretty way of part-nationalising a bank? Which is necessary. But still not the real issue.

Which is *drum roll* how do you give executives entrepreneur-like responsibility over the companies they run?

It seems to me that they get all the rewards without the risk.

And that is where the fundamental problem lies.

Which investors know.

And so, if you’re going to regain their confidence (the investors that is), you have to make sure executives have some ’skin in the game’.

What think thou, esteemed Troppodillian?