Does The Bank Bailout Spell Socialism? Why Won’t Geithner Let “Zombie Banks” Fail?

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President Obama has come under the radar. Publications like the Huffington Post and the Financial Times are questioning whether he has failed already. Why? Because Tim Geithner has proposed a bailout plan for zombie banks that capitalists believe should be allowed to fail.

The writing is on the wall. Critics and journalists are pointing fingers at Geithner’s plan.  Martin Wolf of the FT goes as far as to say that if the plan fails then so will Obama’s credibility. Arianna Huffington says that Time Geithner is on the wrong side of the issue and that much like his predecessor Hank Paulson, he is more concerned about saving certain banks rather than saving the banking industry.

So what is the right answer? To nationalize banks? To recapitalize them? Or simply to let them fail?

Capitalism has probably never been as contentious as it is now.  Martin Wolf points out and Arianna Huffington echoes that the problem that many American banks are facing is not one of liquidity but rather insolvency.  Now let’s examine these terms for a moment:

Liquidity is the ability to move around assets.  For example, having cash on hand means that you have a certain amount of liquidity.  You can spend it for a wide variety of goods. Solvency is your basic balance sheet:  Do you have more assets than debts?  In a strictly budgeted scenario, if you have more debts than assets, you are not solvent as all your income goes to servicing those debts.  You can’t move around assets easily because everything is tied to a debt. Insolvency is the same as being frozen.

So is it true then that the banks can be liquid…with plenty of cash on hand….yet insolvent and unable to service debts? Are the two not inextricably linked?

And why is the Obama administration propping up the banks? Arianna Huffington says that “it’s time to take off the kid gloves Geithner and Larry Summers are using to handle Wall Street and pull the plug on Geithner’s deeply flawed plan.” That the members of the House Financial Service are only focused on things like corporate jets and CEO bonuses.

Is this true or will a bank failure actually have a domino effect on the economy at large? Think for a moment what will happen if banks are allowed to fail.  What then happens to the American public’s savings? If the banks are nationalized, then wouldn’t we be on our way to the socialism that President Obama was labeled for by Republicans during his campaign? Like Doug Sandler, the chief equity officer for Riverfront Investment Group LLC pointed out,  would you want to own a bunch of bank stocks when you know the banks are kow- towing to Washington. (Bloomberg).

So what else is the Obama administration going to do but save the banks? Is this the right answer?  Is there there a right answer? Have we arrived at a crossroads where we are redefining capitalism as part of the change brought by Obama? Send us your comments.  We want to know what the American public thinks.

Image Credit: Post Gazette

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