Penny Wise Pound Foolish Obama Administration Kills Shadow Banking System

Posted by Michael A. Kamperman on July 15, 2009

Have we learned nothing from letting Lehman Brothers go belly up without a plan to absorb the fallout?  I guess not.  The Washington Post is reporting tonight that the Obama Administration has decided not to provide anymore financial aid to small and medium business lender CIT.  In truth the shadow banking system model is dead.  The asset-backed securities market is dead and it no longer makes sense to borrow short and loan long.  But why not arrange a government sponsored takeover ala Bear Stearns, Washington Mutual, or Wachovia?  If Treasury Secretary Timothy Geithner supports this he should be fired by President Obama.  If Treasury Secretary Geithner does not support this, then he should tender his resignation to the President.  Tonight, up to a million small businesses will be scrambling to find an alternative lender.  Most of these business owners will go to banks that have tightened credit to ridiculous levels and will find no lifeline.  Unfreakinbelievable!

This would be alright if the Obama Administration had cleared the decks for the banks to absorb the lending lost to the shadow banking system.  But they have not.  There is no “bad bank” to absorb toxic assets.  The recent scheme to leverage and purchase the toxic assets from the banks for pennies on the dollar is a flop.  The shadow banking system, when combined with Wall Street and the asset-backed securities market, accounted for over 70% of all of the credit extended in America in recent years.  The banks need to step up and absorb this loss of credit to the nation.  But the banks remain zombies and are in no position to do it.

The Great Depression happened because the dominoes kept falling into each other.  Tonight, if the Washington Post’s reporting is accurate, more dominoes just crashed into the Main Street economy.  We are in a depression now and it is rapidly heading towards a New Great Depression.  The only hope is that Washington will find the political will to stand up and be counted.  That did not happen tonight.  Nero fiddled while Rome burned.  I imagine our Congressman, Senators, and President have a symphony to attend tonight.  If the FDIC is not going to risk losses and support CIT, then the FDIC needs to tell the banks that were so anxious to repay the TARP like Goldman Sachs and J.P. Morgan that they can no longer issue bonds guaranteed by the FDIC.  Please, let’s support Main Street for once.