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Who’d have predicted this headline a year ago: Seasoned Wall Street Hedge Fund Executive Endorses Dose of Socialism to Revitalize Capitalism.
But that’s the gist of a private conversation held yesterday. Speaking freely on the condition that we wouldn’t identify him, a hedge fund executive likened the current banking and credit crisis to a city on fire and a clogged highway blocking fire fighters. Don’t repair the road first, he said. Find a better route that gets water where it’s needed as fast as possible. Fix the road later.
In this case, he suggested, forget about rescuing big banks in peril. If they’re not viable, don’t throw good money after bad. Let them go, but gently. Ease their passing to avoid another Lehman Brothers shock. Reassure investors that Uncle Sam stands behind critical obligations in an orderly market.
Then use taxpayers’ money to capitalize a brand-new, pristine bank with unhampered credit capacity. It would resemble the Resolution Trust Corporation that bailed out banks and thrifts nearly two decades ago, but on a much larger, global stage. Limit its active role to two or three years, enough time to jump-start credit markets. Then wind it down until all loans are retired, say by 2019.
Who would run it? No whopping bonuses required in this scenario, says the Wall Street vet. The new bank would attract top talent motivated by nobler incentives -- an exciting job at the center of a crisis and a powerful career credential afterwards plus, of course, a “respectable” salary. But would his modest proposal survive critics in Congress with knives out for more government bureaucracy? Probably not, he concedes, "given the vicissitudes of Washington."
In any case, the solution evokes an earlier world turned upside down and the federal bank that helped restore it. In 1781, a year after Congress scrapped the worthless Continental currency, secretary of finance Robert Morris took the reins in a war-torn, fledgling nation bereft of credit. An adroit financier often vilified for his motives, Morris capitalized the Bank of North America with a dollop of private credit and a wagonload of French gold intended for empty Congressional coffers.
The Bank of North America’s earliest loans helped provision an army charged with keeping British occupiers at bay until the Revolutionary War ended. Despite regular battles against renewing its charter, the country's first chartered commercial bank remained in business for several decades while a U.S. banking system emerged around it.
As for poor Morris, signer of the Declaration of Independence, the Articles of Confederation and the Constitution, a mentor to Alexander Hamilton, and confidant of George Washington, kudos vanished when disastrous real estate speculation ended his public career in debtor's prison. His heirs in speculation may have it easier today.
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