The Geithner Plan Explained
I found this very clear explanation of the various alternatives for dealing with the toxic assets that litter the banks. It is by Mark Thoma of the University of Oregon:Economist’s View: Government Intervention in the Market for Toxic Cars
The key point to keep in mind is the objective. We are trying to rebuild the economy. Rebuilding the banks is merely a step along the way. So we should not focus too much on the cost, or subsidy, that flows to the banks as long as their subsequent return to health gets the entire economy going. The benefits of a healthy economy will probably outweigh the downsides of subsidy costs.
But.
As Thoma’s examples clearly explain there is a wide margin for error in any plan. The essential point being that the market has broken down almost completely with respect to ‘discovering’ prices for these toxic assets. We are literally groping in the dark trying to find out what they’re worth. So the chances are very high that the government will overpay were it to offer a simple price. Plus it is highly unlikely that the banks will surrender the assets for anything less than a subsidized price: think about that for a moment … why would a bank give up assets it thinks it can sell in the future for a profit, even if they are worthless now? The banks can either be forced to surrender the assets via nationalization, or they will have to be induced to surrender them. This latter option will inevitably mean handing over a premium, i.e. giving them a subsidy.
In any case. We are about to fork over yet more cash to the bankers who made this mess.
And that remains the sticking point for me.
The Geithner plan implies that the banks are well managed and well run and that they simply ran afoul of some ‘bad luck’. Once the government has relieved the banks of the consequences of this bad luck they can get back to being the terrific well oiled machines that we all know they are.
I happen to think that the banks made the mess: it was a direct result of the way they were run and the policies they implemented. Unless there is significant change in the way banking is carried out we will experience this whole crisis again.
And we cannot afford to.
The cost of abating and fixing this economic mess will be to drive the national debt up to about 80% of GDP. It was about half that up until recently. It will take quite a while to get that debt back in line. Meanwhile we have no room for any more economic crises. So getting the banking system in order so that it does not destabilize the economy again is vital.
So. Much as I dislike the Geithner plan – it is an overt subsidy to private financiers – I can go along with it as long as the much ballyhooed re-regulation of banking institutes very strong restrictions on both the maximum size of a bank and the scope of its activities.
The real fight will be over regulation. This subsidy is simply a foretaste of what’s to come.
