Open Left has a round-up of econ-bloggers on the Geithner bank plan (reproduced more or less in its entirety):
Krugman 2: The Depressioning
Hope.
The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system - that what we're facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
If I'm right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory. The cost will be continued vast over-capacity in banking, and a consequent weakening of the remaining, smaller, better- managed banks who didn't participate in the garbage-loan frenzy.
Krugman 2: The Depressioning
But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets. Actually, that's not quite it: the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls "a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for [I don't think I can finish this on a Times blog]"
With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.
[...]The stalemate over banking has arisen because the economics team has been unwilling to take on the bank shareholders and management. It now reportedly plans to clean up the banks' assets through a new alliance of hedge funds and taxpayer dollars. That simply won't happen. The public won't tolerate such games for another round. The public won't accept more money going into financial bailouts until the banks are clearly being run for public benefit, not for the private gain of undeserving shareholders, management, and traders. America will not right itself until it regains a moral compass in economic affairs.
Oh, almost forgot Duncan Black:
We are so screwed.Hope that puts things in perspective for you. Obama may have done the right thing (maybe on too small a scale) with the stimulus bill. He's doing a great thing closing gitmo and re-instating the bill of rights. He may be doing great things with health care policy, with the war, with stem cells, teh gay, abortion, and federal judges. But I really fear that it's not going to matter -- that he will wind up a massive failure by surrounding himself with Wall Street apparatchiks who just can't bear to let their alma maters fail, and in the end will subsidize trillions of dollars in losses with taxpayer dollars.
Hope.
4 comments:
And this, children, is what happens when government runs private industry. Sorry, but this was inevitable.
Maybe you're just being flip, but if you're not, you're really really missing the point (or not paying attention to the actual policy debate). This crisis is not due to an excess of government involvement in the banking industry, but too little -- too little in the incipent phase, too little in the acute phase, and now too little in the resolution phase.
The banks were left to place bets on an inflationary mortgage bubble with no requirement that they actually have the reserves to pay if their bets went bad. Banks were allowed to merge and merge again until they became so big that their failure would take down the economy with them. The first bailout was just money given to banks with no strings attached (none of consequence, anyway). And now the plan is just to nationalize the losses, while privatizing the profits.
This has nothing to do with "government running private industry." If the government has actually stepped in and run the industry, well, that's actually what the quoted economists think we should have done from the beginning.
So you can snipe libertarian all you like, but in this case it's -- what was the phrase we used? It's not even wrong.
"Children?"
I didn't make my point clearly enough.
Krugman wrote:
"The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system - that what we're facing is the equivalent of a run on an essentially sound bank."
This being completely wedded is because the government now owns banks and needs to create a market whereby the valuations are not too far below what the banks want/need.
Galbraith writes:
"the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, "
This is also an accounting trick the government can not help but employ when faced with these problems.
Sachs writes:
"America will not right itself until it regains a moral compass in economic affairs"
which is directly to my point. Government running banks (and bailing them out) removes the moral compass entirely.
And Josh, "children" is a relatively common turn of phrase used to introduce a point of argument in the trappings of a lesson. I employed its use because our government is so damned set on the path of wanting to run our banking system and I think it's a bad idea and that they need a lesson in basic economics.
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