World Leaders Ponder Financial SHutdown

[Muskie]

http://www.bloomberg.com/apps/news?pid=20601087&sid=aP5mpMUORBWM

"The idea of suspending the markets for the time it takes to rewrite the rules is being discussed,'' Berlusconi said today after a Cabinet meeting in Naples, Italy. A solution to the financial crisis ``can't just be for one country, or even just for Europe, but global.'' The Dow Jones Industrial Average fell as much 8.1 percent in early trading and pared most of those losses after Berlusconi's remarks. The Dow was down 0.5 percent to 8540.52 at 10:10 in New York."

[GoMuskies]

Holy f***!

[Snipe]

Banks won't lend to other banks because nobody knows which bank is going fail next. You don't want to lend someone 50 million today and have them belly up tomorrow.

You could call for a bank holiday. You could examine all the banks to see who is solvent and who is insolvent. The poorly run banks that are insolvent need to go away. If too many banks were going to fail, you could help some out (say start at the 95% solvent range or higher). The worst banks would still be weeded out.

Once it is determined all the remaining banks are solvent, then nobody should have a problem trusting them. The market needs more information. That is one solution I have seen kicked around. I don't think it is a bad idea. I don't know how you go about it though. The devil is always in the details.

[Muskie]

Yes but won't this create a run on the banks before the "holiday".

[dc_x]

Banks won't lend to other banks because nobody knows which bank is going fail next. You don't want to lend someone 50 million today and have them belly up tomorrow.

You could call for a bank holiday. You could examine all the banks to see who is solvent and who is insolvent. The poorly run banks that are insolvent need to go away. If too many banks were going to fail, you could help some out (say start at the 95% solvent range or higher). The worst banks would still be weeded out.

Once it is determined all the remaining banks are solvent, then nobody should have a problem trusting them. The market needs more information. That is one solution I have seen kicked around. I don't think it is a bad idea. I don't know how you go about it though. The devil is always in the details.

It's not that easy to figure out which banks are solvent and which aren't. Until you have some degree of certainty as to the value of mortgage-backed assets, there is no way to know what assets are worth and, therefore, how much capital any bank has. The TARP should help provide a valuation, but the TARP is still weeks away from being a reality.