Recapitalization of the banks

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By Harris L. Mayer

Dear Editor,

Today one of the most important problems of the financial system is undercapitalization of the banks.  That restricts their ability to loan money to business, particularly short-term loans, the loans that contribute greatly to the flow of money in the system. There is an idea for providing that capital and reaping the consequent benefits.

The U.S. Treasury sells special “S’” bonds to otherwise solid banks and other savings institutions at the local level. But, and here is the essence of the idea, the banks buy them on the installment plan. Say they are 14-year maturity bonds paying 5 percent interest, and they are to be purchased gradually over the first seven years.

Just as a person can buy an automobile on time, use it immediately and pay later, a bank can use the total value of the bonds as collateral at once in financing loans.

As an additional financial aid during the first seven years, the bank will get steady guaranteed income from the 5 percent interest, even, before the bond is fully purchased.

Afterwards,  when presumably the bank will be healthy,  it can help the Treasury by holding the bond, to maturity. In essence, the future bounty of our healthy society will finance the current troubled, economy in climbing out of recession.

The scale of this liquidity help may be massive, say of the order of hundreds of billions of dollars but if the economy recovers  that will easily be repaid by taxes on tile resulting profits.

This process involves the least government interference in the day to day operation, of the bank, but the government  still has tremendous leverage by its power to call for immediate payment in, full, if proper standards of operation are not observed.

Harris L. Mayer