Dig a hole. Fill it with debt. Mark the spot. Your kids will find it...
It is Friday, Day Five of the Wall Street meltdown. I have just reported on BBC World News America (10pm Eastern) that Democrat lawmakers plus Paulson and Bernanke have agreed in principle a massive deal to get rid of the bad debt in the US banking system. There will be a "power" rather than an institution but essentially as with the Resolution Trust Corporation in the 80s, and the Home Owners Loans Corporation in 1933, a government backed "bad bank" will be created and all the bad debt poured in.
So far about $500bn of bad debt has been declared. Expect this now to double as banks rush to dump their nuclear waste into the Federal Reserve's landfill site.
Is it a good thing? Well it will do two good things: it will prevent homeowners in America, and beyond, from being repossessed; and it will stop a 1929 stock market crash. But it is testimony to the fact that nothing else the Fed/SEC/Treasury did actually worked. The decision to sacrifice Lehman, bail out AIG, pump 180bn into the banking system, take junk bonds as collateral for AAA gilts etc, the banning of short selling - none of it actually staved off the threat of a retail bank collapsing or spillover into the world of airlines, departments stores and car factories.
Once it is clear the state is taking on the bad debt, bank shares will soar. There will be immediate and tangible private gain in return for the public nationalising the risk.
So what is the quid pro quo. First, it's possible that the taxpayer will make money: this happened when Norway nationalised two major banks and I am told also happened with the Home Owners Loans Corporation, set up by Franklin Delano Roosevelt in 1933. Maverick bank analyst Bruce Packard of Pali International should feel vindicated: he put out a note predicting this, more or less, four weeks ago, and kept on reminding the world that HBOS was the riskiest bank in town.
Second, I am guessing the Fed has assured Congress that it will get to categorise the debt, and put a price on it, not the busted banks offloading it. This will ensure the best possible deal for the taxpayer, though it is still a bum deal.
Third there has to be some kind of regulatory price. This is what nobody knows right now: has the Fed/Treasury got the bottle to impose on the investment banks some kind of separation of powers deal as in the 1933 Glass Steagall Act, which effectively banned investment banking as we know it by preventing deposit takers from market speculation?
There is only one problem. The last of HOLC's debt was paid off in 1951: these solutions impose a stagnant, effectively state capitalist solution, on the finance sector.
We will know by Monday if it has worked. Only our kids will know if it was the signal for a decisive regulatory turn that killed off speculative bubbles and stabilised the system long enough for the politicians to regain control of the economy from the investment bankers.
I am off to bed and to catch a plane, hoping that British Airways' credit is still good at the airfuel pumps so I can be on Newsnight tomorrow night to update you on this. For now, on the last night of my American Journey, I can only leave you with the immortal words of the late, great Judy Garland: "Toto. We're not in Kansas anymore".