Geithner’s Plan and That ‘N’ Word
To have a healthy economy we need healthy banks. We need the credit markets to work. We need loans to be available so that businesses can expand and hire more workers. It’s that simple. The current extraordinary and totally unproductive hyperventilation about banks and the supposed evils of the moneyed classes doesn’t get us very far along the journey back to health. The populist nonsense I read daily, some of it from people who ought to know better, builds an atmosphere in which hard decisions become impossible. We appear to be stuck in a slow dance where the partners are still trying to figure out the steps even while yelling abuse at each other. This has to stop.
And I wish I could say Geithner’s plan helped. But is doesn’t much.
Here’s how the New York Times explains the reaction to his speech: Geithner Sets Out Sweeping Overhaul to Bank Bailout
Most of the criticism I have read, apart from the ideologically driven stuff from the far left, centers around the ‘alarming’ lack of detail. If a plan is a clear series of steps that lead to a desired objective, this is not a plan. It’s not even close to a plan. It is more of a wish list and set of suggestions of things that might become a plan.
For those of you who want to read the real article, here is the full text: Text Of Geithner’s Plan
Having said that this does not qualify as a plan, I have to admit there are some good things here.
The focus on transparency is essential. One of the major causes of the current malaise in banking is the opaque nature of bank balance sheets. No one knows what the bank’s own. This is a direct result of the banking lobby being able to prevent the accounting standards board and the Federal regulators from instituting better accounting clarity. I know I am beating a dead horse here, but transparency is ideologically repugnant to the ‘deregulate at all costs’ crowd. Pushing back hard against the reluctance of banks to reveal the true nature of their assets is a tremendous first step toward re-establishing confidence in the credit markets.
My point on this is simple: why not convene an accounting and financial summit to establish new accounting regulations for the banks? Get it done now.
Once the market can see what a bank owns it will quickly place a proper value on that bank. Then at least we will know the extent of the damage. Up until then we are still left guessing. So even though Geithner takes a firm step toward transparency I fault him for indecision. Then again at least he admits we are all learning, so hopefully he can overcome this diffidence quickly and get on with the job.
His notion of a ‘stress test’ for the banks is borrowed from the Swedish government. It is also an excellent idea. It would force the banks to come clean about their solvency. Coupled with greater transparency going forward this would allow us to cleanse the system of bad assets with all the information in front of us. Again: this helps remove the guesswork and restores confidence. But here also Geithner seems to pull his punches. What happens to the banks consequently revealed to be insolvent?
Well, apparently we want to encourage the offloading of the bad assets into private investor hands. Taxpayers will provide some sort of guarantee to allow investors either to purchase bad assets or to buy equity in the banks. Both of these actions would address the insolvency problem. Unfortunately the plan leaves us guessing as to which we will actually do, and as to how we actually do it.
As I said not so much a plan as a statement of intent.
The third aspect of the plan is to inject vast sums of money into small business and home lending markets. This is very laudable. The economy is starved of funds so the notion of the taxpayers pumping in over a trillion dollars is welcome news. This expansion of the Fed’s direct involvement is very positive and a bold move. How it will work we have yet to see.
So overall the plan is more a laundry list of things to do rather than what we can call an action plan.
But the negative reaction flooding the airwaves yesterday misses the point. The fall in bank stock prices is not necessarily an indictment. We should be careful before we argue that a drop in bank stock prices is a bad thing. It may simply be that, at long last, the markets are understanding that the banks are in hopeless condition and that current shareholdings are worthless. If that is true then Geithner’s speech helped inject reality into the discussion.
One last thing: it was not Geithner who disappointed me most. His plan seems to be a vague work in progress. So be it. At least it has guideposts toward a better future. What was worse was the opposition that Obama subsequently mentioned towards nationalization. This has to stop.
The FDIC has closed several banks so far this year, that’s nationalization. It is a fairly common occurrence, especially among smaller capital constrained local banks. So the idea that nationalization is ‘un-American’ is just silly.
It is this ideological mind block that seems to have led Geithner to present such a muddled set of ideas. There is no credible hard nosed plan he could have put forward that leaves out the possibility of nationalization. Once you remove that option any plan or set of proposals is instantly vague.
And that’s what we heard from Geithner.
One last though: perhaps they are merely setting the game up for later? The nationalization meme has to spread a bit first before we can get down to the hard work. So let us all hope that Geithner’s speech was deliberately vague in order to demonstrate how few options we have left before we resort to the dreaded ‘N’ word.
