A Trillion Dollars for the Banks: How About a Second Opinion?

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.

It is time that we stop taking what the Wall Street boys tells us at face value. For some new ideas see the new collection from the Progressive Ideas Network, Thinking Big.

Comments

[mbaty]

We have been given a huge opportunity as a society with all of this economic nonsense. For starters, we are being forced to reevaluate what is really important and what has value and how we place value on goods and services. Money is supposed to be a convenient way to trade value, but it has become a control mechanism for most people. The people we entrusted to help us with our finances have instead fleeced us at every level. Now there's over 700,000 houses that have been foreclosed on in America the "land of the free." That means at least 700,000 people displaced or homeless while 700,000 houses sit vacant. It doesn't make any sense in the real world of day-to-day needs, and that is what it's boiling down to. What is important? What do we need to collectively thrive? And how are we going to efficiently solve the problems of Every Society Ever like shelter, food, water, healthcare, transportation, etc? It starts with generosity and compassion and leads to true national wealth.

[outnow]

Geithner is saying' "Don't rock the boat!" - while he rearranges the deck chairs on the Titanic. The problem is that most of the passengers do not have lifeboats.

There must be some pain for a recovery to take place. The sooner we face our withdrawal symptoms, the sooner we can get back to business in the real economy.

Prices are distorted like images in mirrors in carnival glass. The market needs to regain equilibrium in housing prices that have not yet bottomed out in the new economic reality. More debt is not going to help because the debt bubble will not be able to be re-inflated by government policy while hyperinflation might be ignited with high interest rates and a falling dollar. The US could default if Geithner keeps doing what he is doing.

Geithner is a debt-merchant himself from his training and experience. All he understands is helping predatory lenders resume their evil ways using taxpayer funds. We have state-run capitalism so let the state run the credit system and issue currency. Nationalization and bankruptcy is better than continuing to bail out zombies which won't work in the long run.