Banks are reporting great earnings. But this is to be expected because making banks profitable is the most politically palatable way for the government to recapitalize the banking system. The government accomplished this by holding interest rates that banks have to pay on their deposits to almost zero and relaxing the accounting rules so they don’t have to be diligent about writing off their bad loans.

It looks to me like the plan is working. If this continues, the banks will make enough money to earn their way out of the bad loans that are still on their books. Read More...

If we've learned anything from last year, it is that our economy is much more fragile than anyone thought possible.

Our government’s policy has created strong incentives for the CEOs of financial institutions that are deemed “to big to fail” to chase opportunities with very large upsides no matter what the risk. If the risks work out, the CEO gets an unbelievably large bonus. If things don’t work out, the chief has to make do with a big severance package while taxpayers pick up the tab for the losses.

As things stand now, our system steers private capital into high risk, high reward bets and relies on taxpayers to provide public capital when the risks go bad. I think it is only a matter of time before one of the “to big to fail banks” makes a big bet that does not work out. When that happens, as we all saw last year, the stock market can drop almost 40%. If we don’t want to go through this again, we need to take advantage of this rally to prepare. Read More...