Kicking the Can: The Issue of Bank Capital

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- In the last quarter century, each and every time politicians have "kicked the can down the road" in order to buy time to protect their banks (with the false hope that there will be a "deus ex machina," i.e., a miracle), the resulting pain is much worse than if the problem had been addressed head on and resolved, even if painful at the time. You can look at this in many ways, including the deficit and entitlement issues in the U.S. But, I am going to limit myself to the financial realm in this particular essay.

Kick the Can: The S&Ls

In 1984, I gave a presentation to a group of senior citizens regarding what I saw as the insolvency of the S&L industry. In social conversations, my wife often recalls the reactions of many of those seniors, many of whom had Certificates of Deposit at S&Ls (back then, interest rates were significantly higher than today's paltry rates). I suspect that the local heart specialists were busier than usual the next day.

The S&L can was kicked down the road for five more years. It wasn't until a new President (Bush #1) was inaugurated that the problem was addressed -- that was 1989. By then, the problem was significantly larger than it was in 1984 when even I could recognize the issue. Because the can was kicked for five years, America went through an unnecessary and grueling recession in the early '90s, in which the financial system teetered and required government intervention.

Truth be told, however, the allowance of the S&Ls to abuse deposit insurance (or at least not appropriately pay for the risk they were layering onto the insurance system) and lack of oversight by the regulators (sound familiar?) should take much of the blame. However, by '89 the crisis was addressed, S&Ls were closed, and the bad loans on their books were dealt with. Because the bad loans were written off, the financial system stabilized and enabled the economy to grow and prosper for much of the rest of the decade.

Kick the Can: Japan's Banks

At about the same time (1989) Japan's bubble burst. In 2002, then Fed Governor Bernanke, criticized the Japanese approach to their banking issues in a famous speech about how the Fed would not let a Japan style deflation happen in the U.S. Beginning in 1989, the Japanese regulatory agencies did not, and to this day, have not required Japan's banks to recognize the losses on their underwater real estate loans.

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