Commentary: Get credit flowing by building confidence

By any standard I've observed over the course of my 55-year career in finance, stock market values are – face it – bargains.

There's a total of $10.9 trillion held in money market accounts and public deposits held in U.S. banks all earning trifling interest. Less than 60 percent of this liquidity would buy every share on the New York Stock Exchange – shares in companies that produce the goods and services required for everyday life. Despite the obvious, however, the owners of the cash remain unconvinced that the market has reached the bottom – so they're unwilling to commit.

This paralysis reflects a collective lack of confidence brought on by the failure of Congress and administrations past and present to resolve the financial crisis that hangs over the country. Obviously, restarting the flow of credit is critical for recovery. Absent this, the stimulus package will fall short of its objectives.

Americans remain angry and confused that while hundreds of billions of dollars have been handed out to banks and other financial institutions, no one has yet provided an understandable context for the problem.

It's been my experience that you can't fix what you can't explain. My conviction is that the financial system was crushed by too much debt and too much leverage resulting from newly created yet flawed financial instruments and practices, unjustifiably low interest rates, incentive systems gone wild, and inadequate regulation.

In the face of this, all that has been offered is periodic pronouncements by policy makers about what should be done. These have the appearance of vamping until ready. The spotlight was recently shone on an announcement, for example, stating that before anything else can be done, there must be new "stress tests" performed on the banks. The last thing we need is another model. As the Bank of England's Andrew Haldane said in a recent speech, "The only model that is not wrong is reality and reality is not, by definition, a model."

Reality is closing in on us as President Barack Obama prepares to attend the Group of 20 Summit in London on April 2. There is plenty to discuss there in terms of cooperation on an international stimulus program, protectionism, and regulation. But the President is in a weak position to put forward a cure for global financial and credit problems that have not yet been addressed adequately at home.

Have we a leader anywhere in the political process that will identify the root cause of the problem and put forth a forceful plan of action to solve it, however politically unpopular that may be? This is asking a lot, especially since public confidence has eroded even further in recent days over the seemingly inexplicable bonus payments to AIG executives. It's the only issue in recent weeks that has forced Republicans and Democrats out of their respective corners.

In the past, irreconcilable positions on grave matters have been resolved through a commission, which can go a long way toward providing political cover and healing the country. But last year was the time for that.

The urgent work of restoring public trust and restarting the flow of credit must be addressed right away. The mark-to-market aspect of fair value accounting, which I publicly opposed as Treasury secretary in 1992, should be suspended. Mark-to-market has become a convenient haven for accountants based on the notion that liquidity is the only determinant of value. It's not. Worse, it forces into present calculations that which can only be reached with the passage of time.

We should also immediately update the rule against short selling unless on an uptick, which was on the books for 70 years until its suspension in a major misstep in 2008. I view it as a one-way highway for expressing pessimism. I would go one step further and prohibit naked short selling for a two-year period.

And we must address the core problem: the banks' troubled assets, which should be bought outright if the system is to be cleared and the economy rehabilitated. As a first step, I would immediately use whatever funds remain in TARP for the Treasury to buy the depressed assets off the banks' balance sheets and start forming a Resolution Trust Corp.-like organization that would carry out the program.

As it started to work, it would give courage to all. But more money will be needed. This involves a government agency, most likely the Treasury, going to Congress for a further appropriation. The figure will be huge, it will be unpalatable, and those who go to Capitol Hill to make the request will be vilified. This is the simple truth.

But absent this bold and direct action, everything else amounts to throwing poker chips at the market, and the market always wins. This is the correct action, and I would gladly help build the necessary political support for it. I'm sure others will help, too.


Nicholas F. Brady, a former U.S. Senator and U.S. Secretary of the Treasury, is chairman of Darby Overseas Investments Limited and a principal of Holowesko Partners.

McClatchy Newspapers did not subsidize the writing of this column; the opinions are those of the writer and do not necessarily represent the views of McClatchy Newspapers or its editors.