Accessibility links

Breaking News

US Banking Solutions Debated

America's banking crisis shows few signs of subsiding, despite hundreds of billions of dollars spent by the federal government to prop up struggling financial institutions and unfreeze tight credit.

It is a basic and, perhaps, obvious truth: capitalism cannot function without capital, much of which is provided by private banks. But roughly half a year after Congress authorized $700 billion to rescue America's financial system - more than half of which has been spent to date - the country's biggest lending institutions remain at risk of failure.

Some, like Senator Richard Shelby of Alabama, the ranking Republican on the Banking Committee, have a straightforward solution.

"I think we need to close them, get them out of business," he said. "If they are dead, they ought to be buried."

Shelby was speaking on ABC's This Week program. His words were echoed by fellow-Republican Senator John McCain of Arizona, who worried that more government bailout money will only prolong an unsustainable situation.

"Some of these banks have to fail," said McCain. "You cannot have 'zombie' banks."

McCain was speaking on Fox News Sunday.

But the laissez-faire, or free market, solution to the banking crisis will inflict great pain on the nation as a whole, according to Democratic Senator Evan Bayh, who also appeared on This Week.

"If they [big banks] were to go down, the problem is: it is not just them. It is called collateral damage. Hundreds of thousands of blue collar men and women, other smaller financial institutions that were not involved in these bad decisions," said Bayh. "They would all pay the price, too."

Some are urging patience, noting that a massive economic-stimulus package as well as President Barack Obama's home mortgage aid program have only just gone into effect. Democratic Senator Charles Schumer of New York says improving the overall economy and preventing home foreclosures will provide a boost to the banking sector.

"If you reduce foreclosures, you find a bottom to the housing market," said Schumer. "And then the banks, which are worried about all this mortgage paper they have, will start lending again."

Schumer was speaking on NBC's Meet The Press program.

But patience and calm nerves may be hard to find at a time when U.S. financial markets continue to drop at alarming rates. Last week, Wall Street's Dow Jones Industrial Average fell to a 12-year low, and analysts say uncertainty over the country's financial picture is contributing to investors' worries.

The Treasury Department is conducting so-called "stress tests" of major banks to gauge their viability in today's tough economic times. But in recent testimony on Capitol Hill, Treasury Secretary Timothy Geithner had few answers when asked what would be done should any banks be judged to have failed the stress test and be deemed fundamentally unsound.

The Obama administration has been criticized for the slow pace of nominations for key Treasury posts under Mr. Geithner, who has been operating without the benefit of a full staff. Sunday, the administration announced appointments for three key positions in the department.