Debt Forgiveness And Hank Paulson The Bank Robber

Over on Automatic Earth, Earthsmile made a comment that we're nearing the point where the extent of the toxic derivatives mess will be fully exposed.

That comment gave me a little spin.

First off, it sure sounds nice. That would put us on the road to recovery. But it sounds so incredibly honest and costly to the banking class!

I've commented somewhere before... (was it here?), that the bank consolidation going on, may be a way to hide debt. If a broken bank, buys a healthy bank that it owes money to, then doesn't the debt get canceled?

I had mentioned this as a way to explain why Paulson is using his powers to seize profitable banks, steal them from their owners and investors and essentially give them away to the bankrupt banks he's trying to save. It seems to me that stealing them for their assets is a good reason to get into the bank robbery business. But perhaps there is another reason that Hank Paulson has become a bank robber, and that is to erase debts.

Well, I don't believe that the biggest banks will ever open their books. So there has to be another way for them to get out of this mess. Robbing healthy banks is a good first step. Next they'll have to work some debt swaps. They could package up debts to each other, that total out to some equivalent quantity, and trade them out.

But finally, after the mergers, after the swaps, there will still be a large debt overhang. They'll still owe a lot, to CDs, pension funds and other trusts. For these, the government will simply forgive their debt. One day, you might have money invested with a bank, and the next, poof, the bank owes you nothing.

This solves the problem of the red ink, and disclosure. Blanket debt forgiveness coupled with further bailouts and no questions asked, will solve this problem for the banks.

And you might ask, won't this ruin trust? Well, when there are only a few banks left in operation, does it matter? Without competition, the worst is still the best.