Friday, December 23, 2011

TBAR: A Philosophy of Banking

An Op-Ed piece in the Wall Street Journal, Christmas Trees and the Logic of Growth by Mark Spitznagel (Dec. 12, 2011) compared the containment of bank failures to the containment of forest fires.

Mr. Spitznagel explained how 100 years ago the U.S. Forest Service set a policy of suppressing all forest fires. Enough dead wood had accumulated over the years that in 1988 a massive wildfire destroyed an area 30 times larger than any previous forest fire. The previous policy of containment was reversed and a new policy that recognizes the need to allow some forest fires to burn to restore a natural balance.

Mr. Spitznagel then compared the outdated fire containment policy of the U.S. Forest Service to Alan Greenspan's bailout of the Continental Illinois bank in 1988. This was the largest bank failure in U.S. history until the failure of Washington Mutual in 2008. There is an informative article about the Continental Illinois failure in Wikipedia and a detailed article (a chapter in a book) at the FDIC. His point is that refusing to admit the losses on the books of many banks is perpetuating a climate of low growth. He said that central banks create a tinderbox when keeping alive bad investments.

Before our banking debacle in 2008 I remember reading articles in the Wall Street Journal that criticized Japanese banks for refusing to admit many of their assets were worthless. Carrying bad loans on their books was keeping their economy depressed. It is easy to see fault in others.

A set of guiding principals about banking might be said to be a philosophy if those principals are formed rationally. But a set of guiding principals about banking could be called an ideology or self-deception if it is based on desires or political considerations that fly in the face of reason.

We need banking in Texas to be managed rationally.


This article is part of the Texas Banking an Finance Project