As president of the Federal Reserve Bank of New York, Timothy Geithner, the new secretary of the Treasury was one of a trio of senior financial officials that determined the response to the burgeoning financial crisis during the later phases of the Bush Administration. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke were the other two. 

The congressional hearing on the Bear Stearns failure in March 2008 made it clear that the details of the rescue mechanism for that firm had been worked out between Geithner and Paulson. Chairman Bernanke responded to questions during that hearing essentially with, “Don’t ask me; ask them—they are the ones with all the details.” 

Since the crack in the dam that the Bear Stearns failure represented, the flood waters have burst. The Treasury has spent or committed $350 billion of Troubled Asset Relief Program (TARP) funds to prop up the banking system. And the Obama administration has requested authority to spend the second $350 billion of the funds. In addition, the administration has asked for congressional approval of an $825 billion economic stimulus package.

The Federal Reserve has not been idle since the Bear Stearns failure, which required an infusion of $29 billion of Fed monies to pay off the firm’s general creditors and derivative contract counterparties. Later, about $306 billion of Fed monies and $45 billion of TARP funds were committed to propping up Citigroup, the holding company owning the country’s largest bank. And $89 billion of Fed monies and $45 billion of TARP funds were committed to Bank of America Corporation, which controls the second-largest bank and the former Merrill Lynch investment bank and brokerage firm.

The next two largest bank holding companies are JPMorgan Chase and Wells Fargo Corporation, each of which received $25 billion of TARP money in November 2008 during an exercise thinly disguising the deteriorating viability of Citigroup.  

The Federal Reserve began to increase the size of its balance sheet (thereby expanding the monetary base) aggressively after Labor Day 2008. The Fed’s current balance sheet (recently varying between $2.1 and $2.2 trillion) is nearly 2.5 times the size of its balance sheet then. Commitments are outstanding that would triple the size of the original balance sheet. 

About $1.2 trillion of the new balance sheet is Fed lending to domestic financial firms through one device or another. About $500 billion is Fed lending to foreign central banks (mostly in Europe). And about $400 to $500 billion is traditional forms of Fed lending activity (combined with traditional open-market operations), albeit in a much greater magnitude than anything ever contemplated before.

Despite all these infusions of financial assistance from the Treasury and Fed (and we ignore further operations of the Federal Home Loan Banks, Federal Deposit Insurance Corporation [FDIC], and the government-sponsored enterprises such as Fannie Mae and Freddie Mac worth $1 to $2 trillion more), the United States financial system cries aloud for more funds. But it still does little or nothing to stabilize household balance sheets, the foundation for any lasting economic recovery. 

For perspective, it is useful to remember that about 130 million individual or family tax returns are filed each year. The commitment of more than $1 trillion of federal funds eventually has to be recovered by taxation (or more likely, by inflation) worth $7,692 per tax return. In this tax filing season, we should look at the amount of taxes owed and imagine what the tax burden eventually would look like if we throw a few more trillions of dollars at the problems of the financial system.

A waggish friend notes that a bank holiday is “the poor man’s Reconstruction Finance Corporation.” Permit all banks to be inspected and by preventi those who cannot pass inspection from reopening for any purpose other than paying off insured deposits. This will sort out the sheep from the goats, show which bank is solvent and which is not on a mark-to-market basis. It also will enable the government to recapitalize the institutions worth saving while preparing for the liquidation of those that are not worth saving. In the current economic climate, banks in all sorts of asset sizes and in all geographic regions would fail the viability test of a bank holiday.       

It is unnecessary to worry about most federally insured bank deposits, now insured up to $250,000 per customer per bank. In addition, the FDIC currently is operating a program (Temporary Loan Guaranty Program) in which banks, in return for a fee now equal to 0.75 percent of the amount insured, can obtain FDIC guarantees for all interbank liabilities and all general liabilities, including uninsured deposits. The program is operated on an “opt out” basis. That is, banks are automatically covered by the program and must pay the fee unless they opt out and demonstrate to the FDIC that they have the claims-paying capacity to warrant this step. All the biggest banks, of course, are signed up, paying the fee, and covered. 

But not all banks have problems. There is an extensive and growing list of FDIC-insured banks that have opted out of the “all liabilities” insurance program. Those are, by definition, the soundest banks. Some are comparatively large, at least on a regional basis, but most of the banks on the list are members of the Community Bankers Association. 

The prudent approach for an investor now is to examine “Sheila’s List,” so named after FDIC Chair Sheila Bair, and to take comfort if the investor’s bank is on that list of banks that have opted out. The list can be viewed on the FDIC’s official website. As for the rest of the banks, bring on the Bank Holiday.  It would be cheaper than continuing the federal bailout, storing up either the inflation or the intolerable tax burden yet to come. 

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