Time for (Self) Shock Therapy

Friedman on the banking crisis...

I was walking by a TV the other day and CNN was on, airing a hearing of what seemed to be a banking committee in Congress debating whether to release more bailout money. CNN didn’t identify the lawmaker who was speaking. He had a bit of a Southern drawl. But I burst out laughing when he said something like: “I remember a time when banks lent money to people. Now it’s the other way around.”

Yes, kids, those were the days — when banks lent money to the people not the people to the banks!
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“Right now,” said David Smick, author of “The World Is Curved,” “the bankers are sitting on mountains of cash, including our bailout money, because they know their true balance sheets are a disaster — far worse than publicly stated.” The situation will likely worsen as delinquent consumer and auto loans are piled atop bad mortgages. “Obama needs to inject some truth serum into the banking discussion. No one trusts the banks, and even the bankers don’t trust each other.” Bringing clarity to bank balance sheets, said Smick, “is the first step to fixing America’s bank lending problem.”

Only after we bring full transparency to the bank balance sheets will we see private capital buying into banks again at scale. But have no illusions. There are still real balance sheet problems that have to be surmounted. This is not just a psychological crisis.