Back to the 1980s for a solution to the financial meltdown?

Posted Sep 17th 2008 10:35AM by Tom Taulli
Filed under: Economic Data

In a way, we are seeing a replay of the 1980s: we are dealing with the consequences of a credit bubble as banks teeter and the economy slows down.

In today's Wall Street Journal [a paid publication], there's a great piece from some of the veterans of that era from former US Treasury Secretary Nicholas Brady, former US comptroller of the currency Eugene Ludwig, and former Fed Chairman Paul Volker.

They don't mince words. Simply put, they think the U.S. financial system is on the brink, and if action is not taken, we may see "the mother of all credit contractions."

What can be done? Interesting enough, there is a precedent: the Resolution Trust Corporation (RTC). This was a strong organization that allowed for the smooth unwinding of the S&L industry during the early 1990s.

Essentially, the RTC had full backing and a clear mandate. And when it completed its job, it actually closed down (yes, that's something that rarely happens with a federal agency).

As for the current situation, an RTC organization would be a buyer of distressed securities. Ultimately, this will encourage more trading, liquidity, and hopefully, more economic activity -- especially in the housing sector.

Unfortunately, policy makers are currently taking an ad-hoc approach, putting out one fire after another. How can this engender confidence? If anything, investors are waiting for the next financial institution to implode, which just becomes a vicious cycle.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He is also the founder of BizEquity, a valuation website

Tags: Eugene Ludwig, EugeneLudwig, inthenews, Nicholas Brady, NicholasBrady, Paul Volker, PaulVolker, Resolution Trust Corporation, ResolutionTrustCorporation, Wall Street Journal, WallStreetJournal

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Reader Comments (Page 1 of 1)

9-17-2008 @ 11:18AM

william lindblad said...

Tom, unless you were around for the RTC you are reading history. While the RTC DID get the job done, it was also quite corrupt.
Today, there is a large difference as the present market is at least ten times the size of what had to be disposed of ca. 1990.
The estimated cost of this period was about 100 billion, and that is in time frame dollars.
This time around it would top a Trillion and that figure does not include what is being pumped directly into the banking system.
It is not confined to the U.S. and if there is to be some kind of clearing house it will have to be through the IMF to achieve enough funding to do it.

9-17-2008 @ 4:23PM

Uhohchongo said...

The '80s slowdown was nothing compared to what we're facing now.

1. The real estate market is still way overvalued. You will see stability once values settle at pre-2000 prices.
2. Any company with ties to mortgages/real estate will continue to rack up huge losses until the RE market stabilizes.
3. Our government is leveraged to the hilt.
4. The average citizen is also leveraged to the hilt and living way beyond his/her means.

There are a lot more variables now than back in the 80s.

I believe the only short term fix is for the Fed to inject $3-$5 trillion into our economy via homeowners and big business.
There is no long term miracle fix. At some point, we are going to have to take it on the chin.