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Nothing chills a market like uncertainty

01/29/2009

I’ve seen this show before. The best thing about seeing it the first time was that it did eventually end!

There is now much discussion about a “good bank/bad bank” approach to solving the credit crisis. The problem is that banks cannot be sure how much capital they have to lend, because it’s impossible to know the value of some of their assets right now. For example, banks don’t know the value of their mortgage-backed securities because everybody is afraid to either buy or sell them. Nothing chills a market like uncertainty! The market is frozen.

I was in Texas during the 1988 – 1992 “Savings & Loan Debacle” when the Federal government created the Resolution Trust Corporation to buy the assets from the troubled S&Ls, replacing uncertainty with certainty, while wiping out the shareholders of the S&L. It worked! Credit flowed. The recovery of Texas began.

Doing this on a much grander scale will be much more difficult, but it must be done. Uncertainty must be replaced with certainty, before our national recovery can begin. Everybody will be relieved when this show is over, and we can write/read the “credits.”

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