Securitization, Zombies, and my Mark Cuban Man-Crush

There's no site I find that makes some of the complex economic components at play in this incredibly complex moment than The Baseline Scenario. And I think James Kwak's most recent post on the effects of securitization on finance and economics really illustrates that. It also stirred some dormant thoughts that I had thought of posting months ago, but stopped pondering when PPIP came out, since so much of the good bank/bad bank debate now seemed moot.

I'll admit it, I do a man-crush on Mark Cuban. I can always count on him to have a piece that makes me think. I don't always agree with his premise, but it is frequently innovative, and always entertaining. Several months ago Cuban laid out a plan to make better use of the increased savings rate, based on the idea of tax credits to individuals that save in institutions that can guarantee a certain percentage of that savings will be used for investment.

Cuban's central assumption, I believe, is that savings per-se isn't problematic. To some extent, the loss in spending can be offset by the multiplier effect that can come from properly functioning credit markets. Specifically if those savings are used to invest, we can more quickly rebuild our economy. I think Cuban is a big believer in Creative Destruction, as am I (at the very least, it's a version of making lemonade out of the lemons so many are getting). So, why not incentivize people to put their savings into institutions that will lend the funds to business that can use them to more rapidly rebuild our economy and have the stimulus come from the private sector.

I've been thinking for a while about what the hidden problems are with this. Obviously, the biggest risk is that reckless lending is what got us into this pickle, and we'd just incentivizing more risk taking. I'm of the opinion though that everyone's too scared of excessive risk right now to not temper that incentive. I'm not sure if I'd want this incentive when the economy is humming along (actually I'm sure I don't). But for right now, incentivizing institutions to lend money and make "better" economic use of it than shoring up their balance sheets .

The other obvious "problem" with this is that could/should accelerate market share gains for those banks with solid balance sheets, and correspondingly losses for those already in trouble) There seems little doubt that this could easily hasten the death of banks like Citi, which the Feds have already deemed to big too fail. There's an entirely plausible opinion by William Bueiter in the Financial Times that gives serious economic weight to the old fashion "rip the band-aid off" philosophy. But that's in the abstract. Would I want to lose my job because we decided to rapidly accelerate the unwinding of toxic assets, and caused more financial panic? Heck no.

But man those zombie banks sound scary. I personally believe that if by prolonging the life of sustained recession that Japan saw because of it's zombie banks would cause more harm in the end. And while PPIP might do a lot to allow the unwind of the "toxic assets" and thus , since it has no mechanism to force the sale of the assets, it could still do nothing. And even if does work, giving the smaller banks that do have good balance sheets a chance to capture market share from these reckless behemoths is probably a good thing.   If we want the banks that capture shares to be able to help fund investments anywhere that might be wise, and not be limited by the banks physical presence, then we must face the same securitization question that Kwak poses. But while I agree with Kwak's position that securitization might be a root cause of the crazed lending bubble we saw, I think the credit-default-swap market was a proximate cause and played a much bigger role. That's another post at a more reasonable hour though.

So why not go try out Cuban's plan? I mean, other than ignoring details like:

• What type of financial transactions would count as a "proper" investment (security purchases, bonds, CDS)?



• What, if any types of hedging would we disallow to ensure that the risk at the source of the investment is properly accounted for?



• What percentage of the new reservers should go to new investments versus what needed to be kept for capital reserve requirements ?



• What should be the trigger that ensures this program dies when the credit markets correct to prevent another bubble and other perverse incentives?

Unfortunately those questions are way beyond my intelligence and expertise to answer. But I'm hoping that someone is on the track of answering them, because I think this plan deserves serious consideration.