Brad DeLong: Ummm... This Should Not Be Happening

Francesco Guerrera and Sarah O’Connor in the FT:

Bank objections delay stress tests: US regulators will delay the release of stress test results for the country’s 19 biggest banks until next Thursday, after some lenders, including Citigroup and Bank of America, objected to government demands that they needed to raise billions in fresh capital. Citi, one of the biggest victims of the crisis that has already been bailed out three times by the government, is believed to have been told by regulators that it needs more than $5bn in fresh capital, while BofA might need to convert $45bn in government preferred shares into common equity...

The banks should not be negotiating with the government over this.

There comes a point when the right thing to do will be to set up a Maggie Sue--a manufacturing, transportation, services, and other business loan-guarantee authority owned by the government, a financial GSE alongside Fannie, Freddie, and Ginnie--to guarantee "conforming" loans to operating companies, and let the major banks wither.

Remember: the purpose of a financial system is to make new loans so that operating firms can obtain financing on reasonable terms. We don't care what happens to the value of old loans or to current-bank stakeholders as long as companies going forward can get new loans.

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That point in time came a year ago Brad. "Maggie Sue" should have been one of the first moves of the Obama administration.

But it's like Ben Nelson said last week, "It would work too well." For the country and the general economy, not for the banking oligarchy.

That will attract some money.