The Bailout Gets Too Big

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The Treasury may have to hire circus clowns and insurance salesmen to keep track of all the US banks it is bailing out. Now that the really large money center and regional banks have the cash, new applications for a piece of the pie are flooding through the door.

Each bank that gets capital is probably going to have to give up some ownership as part of the Paulson plan. It will require a lot of people to track the loans and equity stakes that go with them, probably many more than Treasury has on hand.

According to The Wall Street Journal, "Treasury and banking regulators say as many as 1,800 publicly held institutions could apply for government investments in coming weeks." It may take the next president two terms in office to process all of those requests.

It is probably a bad idea to let all of those smaller financial firms apply. If the law allows them to ask for money, they should probably be turned down. The tremendous trouble in the credit system is with large global money center banks which have substantial amounts of bad assets on their books. If the lending among them and to their customers frees up, the entire system ought to see improved liquidity. If they hoard their capital, lending from small banks is not going to make a difference.

The other reason every bank on every street corner in the US should no get Treasury money is that it defeats the Darwinian benefit of every economic downturn. The weak entities get washed out of the system through bankruptcy or buyout. Contravening the natural attrition of firms that cannot stand on their own would only mean they may fail further down the road, which would slow the eventual recovery of the financial system.

Loaning money to a great many banks is almost like loaning money to none. It only forestalls the day that the malignancy in the body of the financial world gets excised.

Douglas A. McIntyre