President Obama recently answered critics who think failing banks should be liquidated by saying it would be "too expensive" a proposition and that the government should "first do no harm". It is obvious that a great deal of harm has already been done to the nation's economy by the elite class of finance capitalists he is generously helping at taxpayer expense. A systematic program to force banks to quickly ascertain worthless assets, write them down and raise private capital or face closure would remove the uncertainty that is crippling the credit markets. Banks taken into receivership could be stripped of their bad debt, bad management replaced, and the restructured banks offered for eventual resale to the private sector. The toxic assets could be transferred to a "salvage yard"--a separate institution where whatever value remains could be realized for the taxpayer. This is what the Resolution Trust Corporation did after the last major bank debacle--the S&L crisis of the 1980s. Primarily because of the unhealthy class nexus between our political and financial elites, our economy is undergoing a death of a thousand cuts: a drawn out process of closed door, favorable deals for influential financial plutocrats. The failing institutions will not on their own reveal the extent of their insolvency, and are simply hoping to survive on government life support until re-inflated asset prices allow them to conduct business as usual again. In the meantime the government burdens the taxpayers it represents with the financial risks and generations of debt while taking a hands off approach to bank management responsible in part for the crisis. Note that Wall Street paid out $18 billion in year end bonuses to its New York employees after the government gave it $243 billion in emergency aid.The cost of restructuring the biggest banks would cost about $1.5 trillion according to the IMF [1]. That is chump change in comparison to what the government is already spending propping up the zombie banks. Just considering assets purchases alone the Federal Reserve will spend up to $1 trillion in the Term Asset-Backed Securities Loan Facility (TALF), $1.8 trillion in the Commercial Paper Funding Facility; $540 billion in the Money Market Investor Funding Facility, and $1.45 trillion to buy debt from its bank stepchildren, Freddie, Fannie and Ginnie Mae. The size of the favorable loans the Federal Reserve is giving to various parts of the crumbling finance establishment are simply staggering: a total of up to $2 trillion[2]. Nevertheless, the IMF recently said more help would be needed. So the answer to the question of why the zombie banks are not closed down is not in the cost of receivership, but is in the power relationships of American politics.
[1] Simon Johnson, The Atlantic 5/09.
[2] Timothy Lavin, The Atlantic 5/09