Treasury Secretary Timothy Geithner wants to have the government lend up to a trillion dollars to hedge funds, private equity, funds and the banks themselves to clear their books of toxic assets. The plan implies a substantial subsidy to the banks. It is likely to result in the disposal of these assets at far above market value, with the government picking up the losses.
As much as we all want to help out the Wall Street bankers in their hour of need, taxpayers may reasonably ask whether this is the best use of our money. After all, the $1 trillion that is being set aside for this latest TARP variation is equal to 300 million SCHIP kid years. Congress has had heated debates over sums that were a small fraction of this size. To give another useful measuring stick, the Geithner plan could fund 1 million of the Woodstock museums that were the main prop of Senator McCain's presidential campaign.
The core problem is that many of our big banks are bankrupt. If they had to acknowledge the losses that they have incurred on their housing related loans (and increasing their loans in commercial real estate) Citigroup, Bank of America, and many other large banks would be insolvent. Thus far, they have avoided reality by keeping these loans on their books at inflated prices.
The Geithner plan is an effort to rescue the banks by using government funding to prop up the price of these bad loans to levels that will allow the banks to stay solvent. It is not clear that the plan is big enough to accomplish this goal, but that is the basic intention. If it doesn't work, then presumably Geithner will come out with another TARP permutation that involves giving the banks even more money.
There is an alternative. Rather than using government money to keep them alive, we could force the banks to go through a type of managed bankruptcy process like the one that is currently being proposed for General Motors and Chrysler.
Geithner has supposedly ruled out the bankruptcy option because when he, along with Henry Paulson and Ben Bernanke, tried letting Lehman Brothers go under last fall, it didn't turn out very well. Of course, it is not necessary to go the route of an uncontrolled bankruptcy that Geithner and Co. pursued with Lehman.
The government could set up an arranged bankruptcy under which creditors have accepted conditions in advance. While this may not be easy to negotiate, the government does have enormous bargaining power in pursuing such a deal. The creditors (other than insured deposits, which will be paid in full) of these banks may end up with nothing if the government just let the banks sink.
The prospect of even an arranged bankruptcy of a major bank will undoubtedly shake up markets, but many safeguards have been put in place since the Lehman collapse. If the stock market goes down for a few weeks or months, who cares? Running the economy to serve the stock market is a sure recipe for disaster; if President Obama fixes the economy, the stock market will do just fine in the long run.
Anyhow, the Geithner crew insists that there are no alternatives to his plan; we have to just keep giving hundreds of billions of dollars to the banks. Perhaps Geithner is right. But before we throw such huge sums away, further enriching the bankers who wrecked the economy, maybe we should get a second opinion.
Suppose that Congress appropriated a modest chunk of money to have independent economists put together teams to construct alternative plans. Why not give M.I.T. professor Simon Johnson, a former chief economist of the IMF, $5 million to hire a crew to outline his preferred path? Congress could give Joe Stiglitz, a Nobel Prize winner and one-time chief economist to President Clinton, who is also a harsh critic of the Geithner plan, a similar sum to put together his own team.
These economists could develop their best plans and put them out for public consumption. Geithner's crew can then tell us why their plans are unworkable and we must instead hand over the money to banks.
Given how much money Geithner wants to spend -- putting it in the hands of the folks that brought on this economic crisis -- it would seem appropriate to first examine all the alternatives. After all, we could find out what our options are in this case for the price of just a few AIG executive bonuses. That has to be a good deal in anyone's book.
For anyone interested in the bailout and a credible opinion of the Geithner toxic asset plan go to the following link.
http://www.huffingtonpost.com/cenk-uygur/william-k-black-on-geithn_b_183848.html
It is a conversation with William K Black who was a central figure in the cleanup of the S&L crisis. The clarity and conviction of his disagreement with the approach taken by Geithner/Summers/Obama on this is quite remarkable.
So, I say support the advisors in the field battling the enemy. I have a ribbon sticker on my car that says, "support the advisors". United We Stand. God Bless the advisors and the U.S.A.
Under the current conditions, America which we use to think of as our country, is controlled by a select few. If you have enough money you get what you want. Until someone with more money decides differently. Unfortunately, working class Americans do not have a say anymore. But isn't that what the Founding Fathers of our country fought for?
Again I think you're missing the boat.
The only reason most progressive economists give for NOT letting the banks go down the tubes with their toxic assets is to preserve financial liquidity.
It is a pretend game.
As if there was a lever somewhere that said that SOME amount of taxpayer bailout - and I mean a DIRECT TRANSFER of negative assets TO the taxpayers- would result in a restoration of SOME $ level of liquidity coming back to consumers.
There's no lever.
There is fiction and hope.
If you want a lever, you take the REALLY new way forward.
You put the banks back to lending real money.
And you restore the sovereign right of the Congress US to CREATE the nation's money, through a government-issue money system.
THIS is the lever that when you move it $ONE BILLION in the direction of the consumer, you get $ONE BILLION in the hands of the consumers.
I urge all readers to please urge their congresspeople to attend the American Monetary Act reform workshop on April 23rd at the Cannon Office Building on Capitol Hill.
Real Progress.
Monetary Transformation Now.
Cmon now, whats it going to take until we face these facts?
What law is it that mandates receivership of failing banks and why hasn't Congress acted upon it. Surely there is someone on their staff who can do some research. Maybe it's time to involve Congress more in this process.
I am a fan of our president, but all of this financial stuff is disappointing.
Because we're talking about markets, and markets can react very quickly to bad news or unwanted news, and the reaction can feed on itself. I mean, what if, right now, the rumor should float out there that the Administration was caving in to the HuffPo experts and considering nationalization?
Without saying it's a good idea or a bad idea, if the markets should fear that it's a bad idea (especially since it wouldn't have any details or all the assurances it would want), it could drive the market down. It could drive confidence down in some companies to the point they couldn't do business as their normal trading partners feared they were going to go down; they couldn't get the ordinary loans they need to do business; people would start taking their money out.
(Watch the Frontline episode, Inside the Meltdown, to get a sense of how rapidly things spiral out of control --) http://www.pbs.org/wgbh/pages/frontline/meltdown/view/
There are risks both ways, but the bigger one right now might be that, like Iraq, the Administration is mum on backup plans simply because there aren't any. Remember, the line in Iraq was that considering alternatives might demoralize the troops (and domestic politics). And then they got stuck in that rut for the next four years.
Tongue in cheek, I hope?
By whatever mechanism will work, whether it is taking over the institutions and their organizational structure, or by some other means, the answer is to compete with the banks. There is no up side to giving money to the banks, it only perpetuates already il-gotten financial power.
The banks' losses are their problem. Lack of credit (if in fact this is a real issue at all) would be our problem. All we need to do is solve our problem. The banks have gambled and failed with their capital. They need to take their losses.... remember? It's part of the definition of capitalism.
We are in the midst of an historic realignment brought on by the twin causes of globalization and the use of artifically created liquidity to mask the effects of globalization on the american economy. If the government acts in the public's interest we will go through a painful but necessary adjustment. if it acts in the banks' short term interest, we will continue to live in denial and ultimately pay a higher price.