Many experts have objected to the Bush and Obama administrations’ ad hoc, drip-drop provision of aid to the nation’s biggest banks.
Most of these critics say the Obama administration should now nationalize the most troubled of these institutions.
Former Treasury Secretary James Baker says let them fail.
“We should divide the banks into three groups: the healthy, the hopeless, and the needy,” he writes in a Financial Times opinion piece.
“Leave the healthy alone and quickly close the hopeless,” Baker says.
“The needy should be reorganized and recapitalized, preferably through private investment or debt-to-equity swaps but, if necessary, through public funds.”
The question Baker doesn’t answer is which banks he thinks are hopeless. The consensus view is that Citigroup and Bank of America are weakest.
But it is hard to imagine Baker, whose economic views always have been moderate, disagrees with another consensus view — that those two banks are too big to fail, that is, that their failure would cause much greater harm to the economy than would keeping them alive on government aid.
However, Baker says we risk following the path of Japan, which during the 1990s handled its financial crisis by offering life support to ailing banks but little else.
If assumptions that banks will rebound as soon as confidence returns to financial markets are wrong, “we risk perpetuating U.S. zombie banks and suffering a lost American decade,” Baker writes.
Investor Jim Rogers also has called on the government to let hopeless big banks fail.
"I think it's astonishing. They're ruining the U.S. economy, they're ruining the U.S. government, they're ruining the U.S. central bank, and they're ruining the U.S. dollar," he told CNBC.
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