Sma' Talk Wi' T

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The Sun Is Setting On British Economy

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The British economy is going even deeper into despair and doom. The scary part is that the British government has spent even more money than the US is planning to with the TARP’s and government loans. Obama and Congress need to take heed. Giving banks taxpayer’s money isn’t the solution. The Investors Business Daily is reporting the grave concerns.

But Britain’s ills hold some lessons for the U.S. Believe it or not, Britain has outspent the U.S. in trying to get its economy back on its feet. It has put more capital, as a share of its economy, into its banks. And it’s spent lavishly on Keynesian stimulus. It hasn’t worked.

Now, it’s talking about nationalizing its banks. But this won’t work either, and the U.S. would do well not to emulate its British cousins overseas.

Nationalizing the banks might preserve them, but it will lead to a skewed, government-directed allocation of capital. Politicized loans will become the norm. Those who aren’t popular or connected — which describes, by the way, many entrepreneurs — will not get loans.

This is already happening in the U.S. with the TARP program. As the Wall Street Journal noted in a news analysis of TARP, “some powerful politicians have used their leverage to try to direct federal millions toward banks in their home states.”

Just imagine these banks being nationalized.

Britain, and for that matter the U.S., would be far better off doing something along the lines of the Resolution Trust Corp. The U.S. formed the RTC in the early 1990s to buy bad assets from hundreds of troubled banks, then sell them on the market.

It worked. Banks cleaned their balance sheets, and began lending again. The system was saved.

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Written by smalltalkwitht

January 26, 2009 at 12:14 pm

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