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Treat it as a systemic failure and do not act on individual situations

Here, the problem seems to lie with the particular individuals involved at the center of American financial authorities. The Three Musketeers to solve the crisis triggered by the sub-prime lending are Ben Bernanke of FRB, Henry Paulson of US Treasury and Timothy F. Geithner of NY Federal Reserve Bank. Bernanke is a scholar who insisted on spraying money from helicopter to simulate Japan's economy in the 90's, and as to the US sub-prime crisis, he has been underestimating the magnitude of the problem and overestimating the health of US economy. Geithner is a career bureaucrat and his claim de fame is that he was in Tokyo as Assistant Attaché (of Treasury) at the US Embassy at the time when the financial crisis hit Japan and was therefore able to "closely observe" the failures of the Japanese bureaucrats to quickly respond to the crisis. He talks about how to avoid the same mistakes the Japanese made, but he does not seem to be clear on what to do, knowing retrospectively what happened to Japan and extracting the lessons from the once-in- a century experience of financial crisis in his own country. But, the real problem seems to lie with the seeming chief skipper, Paulson. He was a CEO of Goldman Sack before becoming the Treasury Secretary. He seems to be the only one who understands the microscopic nature of the problems at hand. But that is a detriment in a situation like now. Because of his strong determination to "solve" problems one after another as if he were still a CEO of US Inc., there emerge more problems one after another. This is because we are faced with a systemic problem, and not a collection of individual (bad) banks. The nature of the problem at hand is the lack of liquidity. This is a syndrome known as "wolf pack" in a group theory. While the wolves are good at attacking the victim as a team, they have a tendency to attack the weakest of the cohort should extreme hunger prevail. The banking crisis is like this metaphor. If Lehman goes, people look at the "next" and all of a sudden, the victim is the weakest of the bunch. When Lehman goes, it is Washington Mutual, and the next is Wachovia. When Wachovia merges with Citicorp, then people look for another victim, and could point to National City. This is an endless process and continues until the last wolf that finds no longer anybody to point its finger. In Japan, we have now only three money center banks, down from over a dozen colorful banks of the 80's. The remaining banks are all mega-banks, and according to the Japanese Financial Services Agency, they are too big to fail. They are not necessarily good banks as they do not pay more than 0.2% interest to the depositors, but they are strong enough to call the shot from their oligopolistic commanding heights. Mr.Paulson's instinct is probably correct as a CEO, faced with major corporate problems, but it is fundamentally wrong in two accounts. At this rate, the US, too, is heading for three mega-banks, which will not serve the customers nor will appreciate how much the public has supported them during the crisis. Like Japan, they will be arrogant and think they survived because they were better and stronger than others. The second account is that he is looking to the Congress to approve the $700 billion buyout funds. Buying bad assets at this stage is not the main task for him. Almost all banks will be saved if a global credit lines are set up and they have access to unlimited liquidity. Banks are failing due to the lack of capital, and stocks falling to almost zero value. This can be avoided if a bank has an access to a "gas station" from which they can pump in necessary liquidity while working out their assets to save the "good bank". You do not have the luxury of the time if other wolves are staring at you, and people, being panicked, are gushing to the internet to transfer their money to other banks. Yes, we live in an age of Internet and the run on the bank, a la 21st century, is to transfer the funds in nano-seconds, as Washington Mutual has experienced. It is no long the long cue banging on the "closed" metal doors of the bank under seizure. This Cyber Panic is like a neutron bomb, and very quiet on the street. The bank has an option of closing the system, but then the real run to the bank, a la 1929-type, will take place.

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