Even the leftish-economist (and born-again attack dog for the Democratic Party) Paul Krugman is disappointed with the Obama Administation’s hints that it will continue the Bush team’s strategy of feeding (our) money to Wall Street until it is again fat and happy.

Mind you…  I might be all for this because I believe our economy can only work if Wall Street “works” (just not necessarily the way Sarbanse Oxley was designed). /1 

OK, I’ve been doing more homework on the “bad” or “aggregator” bank idea that seems to be gaining ground. And, here’s what I am thinking:

It’s mainly based on a false analogy.

What (other) people are thinking about (it’s pretty clear to me) is the Resolution Trust Corporation (RTC), which (they THINK) cleaned up the savings and loan mess.

That’s a good role model, as far as it goes.

However, the creation of the RTC did not rescue the Savings and Loans (S&Ls). The S&Ls were rescued by:

(1) having the Federal Savings and Loan Insurance Corporation (FSLIC) seize them, cleaning out the stockholders;

(2) having FSLIC pay down enough debt to make them viable; and,

(3) reselling them to new investors.

You see, the RTC’s takeover of the bad assets was just a way for taxpayers to reclaim some of the cost of recapitalizing the banks.

What’s being contemplated now, if Sheila Bair’s interview is any indication, is the creation of an RTC-like entity without the rest of the process. The “bad bank” will pay “fair value” (whatever that is) for the assets.

But, how does that help the situation?

It looks as if we’re back to the idea that toxic waste is really, truly worth much more than anyone is willing to pay for it – and, that if only we get the price “right”, the banks will turn out to be solvent after all.

In other words, we’re still in Super-SIV territory; the belief that fancy financial engineering can create value out of nothing.

Deep breath.

Color me skeptical… I hope the buzz is wrong, and that something more substantive is being planned. Otherwise, we’re looking at Hankie Pankie II: Paulson may be gone (Wall Street hack), but officials are still determined to believe in financial magic.

Peace be to my Brothers and Sisters.

Brian Patrick Cork

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1/ Are you familiar with the theory of “flawed design”?