Psst..The Banks Are Insolvent; Please Don't Tell Wall Street

PROPPING UP THE BANKS WILL PROLONG THE RECESSION
Here's the dirty, dark secret nobody with a stake in the economy wants you to dwell upon: the biggest financial institutions in the U.S. are insolvent.

Economists like Paul Krugman and people like Robert Reich have been saying this for awhile, but, they too, seem to bury the sentences in their prose. Everybody seems frightened to deal with the 800-pound elephant sitting in the corner for fear of causing the stock market to dive into a free fall of epic proportions. The rationale from a banker's perspective is sound if you account for the fact that the health of the industry is predicated on consumer confidence in banks. From a political and policy making standpoint, feigning it's importance through the lack of public discourse is dangerous.

On the heels of Tim Geithner's universally-panned debut in unveiling the administration's newest plan to bailout the banks, it should not shock observers that the same group of officials who oversaw the crumbling of Wall Street would find loopholes to further cover the backs of their brethren once they came into power. Nicholas Von Hoffman at The Nation crafts a scenario where the slavish nature of Washington to the banks mirrors the dreaded comparison to Japan's economic "lost decade" of the 1990s.

Try as the nation would, it could not return to prosperity. According to most everybody who has studied it, the reason Japan was unable to cure itself was its policy of propping up the country's major banks, which were largely insolvent.

As mentioned, the banks--Citigroup and Bank of America, notably--are insolvent. While hackneyed Congressmen skewer the executives of these banks for dubious spending habit while receiving government aid, the money in the first round of $350 billion in TARP aid did nothing to release the credit crunch. This phrase has been overused lately, but, the government is really spending good money after bad and it likely will not cease as long as former bankers in the administration continue to enable the industry.

The problem is we live in an era of politicians institutionally frightened to make the tough decisions. The American economy needs to take its bitter medicine. Von Hoffman writes bluntly: "Doubtless they are scared out of their wits at what that might do to the stock market. The market will take a big hit, but in due course it will bobble up again. That's what markets do."

It seems prolonging our current situation by sidestepping the problem is what politicians do.