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Ian Welsh

Ian Welsh

Posted April 8, 2009 | 03:33 PM (EST)

Elizabeth Warren: Finally Someone With a Clue How to Handle the Financial Crisis


Elizabeth Warren's the chief watchdog for the 700 billion TARP fund. Unfortunately, she has no real power, but it's still nice to see a government official say not just some of the right things, but almost all of the right things. Talk of how the US is following Japan's path is finally everywhere (myself and a few others have been talking about it for years, and started really beating the drums last year). Here's Elizabeth:

Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade."...


... Warren also believes there are "dangers inherent" in the approach taken by treasury secretary Tim Geithner, who she says has offered "open-ended subsidies" to some of the world's biggest financial institutions without adequately weighing potential pitfalls. "We want to ensure that the treasury gives the public an alternative approach," she said, adding that she was worried that banks would not recover while they were being fed subsidies. "When are they going to say, enough?" she said.

She also calls for the resignation of the CEOs of the worst firms.

One thing I'm tired of hearing though is the phrase "lost decade." Japan didn't just lose a decade, it has never really recovered. The good times have never come back.

I also think that bondholders need to take a haircut as well, not just shareholders, though they may not need to be wiped out in all cases. However, if the value of a company if it was liquidated is less than zero, then yes, non-secured bondholders (those whose bonds aren't attached to specific assets with value) should be wiped out.

I don't have much hope any of this will occur. Warren's not part of the boys club of Summers, Geithner, Bernanke and Obama who's making the decisions. But one can hope...