Those championing the bailout and its re-hatching are spreading a simple message, “don’t call it a Wall Street bailout.” Being vehemently against the bailout, I concur. For the idea of aggregating the entire banking industry draws a misleading picture of the events taking place. The aggregation treats the current crisis as if it were a violent storm beyond anyone’s control.
F. A. Hayek decades ago addressed this problematic veil masking the real situation,
“The basis for this point of view is the conviction that the coarse structure of the economy can exhibit no regularities that are not results of the fine structure, and that those aggregates or mean values, which alone can be grasped statistically, give us no information about what takes place in the fine structure.”
The coverage of the other week’s post-bailout rejection crash completely ignored the finer points. The central being, not all banks are in trouble. When the Dow falls 700, this tells us almost nothing regarding events on the ground. What investors are really witnessing is an acceleration of the market process. Weak banks expecting the bailout suffered and those who did not carelessly engage in reckless loans gained …extravagantly.
Here is a list of the day’s big winners in the financials by one-day percentage increases:
Dearborn Bancorp (DEAR)
LNB Bancorp (LNBB)
BRT Realty Trust (BRT)
The Bank Holdings (TBHS)
First Federal Bankshares (FFSX)
Ameriana Bancorp (ASBI)
Origen Financial (ORGN)
Penns Woods Bancorp (PWOD)
As the major banks have frozen their lending, capital at lightning speeds is reallocating to productive areas. Investors should not be asking, “How do we make companies unwilling to lend open up?” Instead inquire, “Where are the new leaders in the industry?” How do we urgently expand and grow the financials which are already bursting with available loans and liquid assets.
This process takes place as capital quickly flows to those entrepreneurs successful in the market. The recovery and future is already evident. The market through the price mechanism reveals the way out. Small banks who have made prudent decisions are grabbing fistfuls of market share and the giants are toppling down.
There exists no such thing as an entire financial or economic obliteration suggested by the doomsayers. People have to invest their funds someplace. The recovery hides not in a rescue package but in private prudent lending, innovation, entrepreneur-driven capital flows, and new leaders in finance.
The big financials are beyond hope at this point. In developmental economics, students are taught a basic principle about entrepreneurship in intervention-laden markets: If the profits from extorting taxpayer money are higher than the profits from honest entrepreneurship, actors will engage in such looting. The incentive structure of the current economy rewards seeking payments from the government more so than finding private methods of restructuring.
If the banks spent more time accepting their reality and less time on the Congress bailout determining the future, the end of the financial crisis would come much quicker.
Investors should focus on smaller banks getting their gears into motion, the ones discerning the values of their uncertain portfolios rather than discerning the demeanor of their local congressman. Don’t look to the toppling monoliths. With such a large bailout in front of them, their interests lay in the "Washington business" not the banking business. Start over with what has worked for centuries, entrepreneurship and innovation coming from the most unexpected places. Look to new financial leaders and scrap the old entirely.