The core problem is that many, perhaps most of our major financial institutions are insolvent. They have more liabilities than assets. A functioning financial system requires solvent banks. And only the government has the resources to manage the massive recapitalization to get the key institutions back on their feet. At that level of generality, the issue assumes a degree of clarity.
All the different fix permutations are just different ways of accounting for the transfer of cash. You can take the banks over and assume their debts. Or just give them tons of money to make them whole. Or you can buy their bad investments at the price the banks wish they were worth and thus get the banks out of under the consequences of the financial collapse they helped create.
It's not clear to me why the dollar amounts spent would really be different in the various permutations. It's all a question of who owns what when it's all said and done and who runs the institutions. According to a brief aside in yesterday's article in the Post, both Geithner and Summers are against having the government run the banks for a transitional period and against wiping out the shareholders of the banks that are in fact insolvent.
What that sounds like is that we'll nationalize most of the banks because we have no choice. But we'll allow the current management to run the nationalized banks and the current shareholders to own the nationalized banks.
Here's a pissed-off Barry Ritholtz (emphasis in original):
I've noticed something I find a bit disturbing about our new Treasury Secretary: He has not yet fully come to terms with his new job, role - and boss. Granted, he's been in the job for only two days. But given the extraordinary circumstances the financial sector and the economy is in, it is important for the Treasury Secretary to get up to speed as soon as possible.
Consider this statement from Geithner, who said that Treasury is considering a "range of options" for its financial rescue plan, with the goal of preserving the private banking system. "We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system."
No! Defending these idiots was your old gig. In the new job, you no longer work for the cretins responsible for bringing down the global economy. Please stop rationalizing their behavior, and preserving the status quo!
Yesterday's 13% surge in bank stocks is a clue as to what an obscene taxpayer giveaway this "bad bank" plan is - its free money for the firms that caused the problems, many of whom still have the same incompetent management in place that caused the problem. Purging toxic assets from bank balance sheets, without punishing the management, shareholders and creditors of these institutions for their horrific judgment will only encourage more of the same in the future.
Here's Dean Baker's deadpan wit:
((A Washington Post article)) describes the TARP as an "effort to free up the credit markets." This is a questionable characterization. To date, the TARP has helped to keep many banks out of bankruptcy. Arguably, this is the main purpose of the fund, since Congress has thus far rejected proposals that would focused the money more on freeing up credit as opposed to paying dividends and executive salaries.
And more from Dean Baker on the mainstream press coverage of the smooth and continuous, Bush-to-Obama didn't matter at all, funneling of a absurdly massive taxpayer wealth to banks:
Does Everyone Think Giving Joe The Pumbler's Taxes to Banks Is a Good Idea?
The Associated Press apparently thinks so. It could not find anyone who thought the idea of buying junk assets from banks was fundamentally a bad idea because it would almost certainly mean further taxpayer subsidies of banks.
All the experts cited in the article accepted that the basic idea was a good one. It's probably also worth noting that the experts cited in the article somehow were not capable of seeing the $8 trillion housing bubble, the collapse of which has led to the worst economic crisis since the Great Depression.
Joe the Plumber's Tax Dollars at Work
The NYT reports on the bonuses paid out by the Wall Street banks, all of whom are now operating with government subsidies. The fact that taxpayer dollars to make some of the richest people in the country (Wall Street bank executives) even richer, is a very important piece of information for the public to know, as the Obama administration crafts a plan that will give even more tax dollars to banks.
Deeper background from Dean Baker and then Jeremy Grantham on the extraordinary and continuing incompetence or maybe it's just sleazy complicity of our economic and financial 'best and brightest' (emphasis added):
Dean Baker:
The country is suffering the worst downturn since the Great Depression for a simple reason: An $8 trillion housing bubble collapsed. The leading lights of economics and finance, with very few exceptions, could not see the largest financial bubble in the history of the world. The result is soaring rates of unemployment and foreclosure, a crippled financial system, and a huge cohort of baby boomers who have seen their home equity and savings vanish and now face retirement almost totally dependent on Social Security and Medicare. . . .
There was no fundamentals-based explanation for the explosion of house prices on either the demand or supply side. . . .
The huge overvaluation in house prices guaranteed trouble when prices adjusted. Homeowners consumed based on the wealth in their home. When housing prices plunged, so too did consumption. The effect of this plunge in demand has been amplified by the collapse of the huge pyramid of creative financing that grew up in the shadow of the bubble and in turn fed its growth. Ever greater levels of leverage on ever more risky loans were the path to big profits in the boom years. This was the path to bankruptcy following the bubble's collapse.
Not only did Federal Reserve Board Chairman Alan Greenspan and the other leading lights of the economic profession fail to see the $8 trillion housing bubble, they somehow failed to recognize the explosion of risky mortgages and the highly leveraged chain of finances built on top of these mortgages.
It would have been hard even for someone without regulatory authority to fail to notice the explosion of these mortgages: sub-prime went from just 8 percent of the market at the beginning of the decade to 25 percent by 2005, but the Fed chair either didn't see this increase or didn't care. As a result, instead of attacking the bubble, those in positions of authority celebrated the rise in homeownership.
Remarkably, even now, economists and policy analysts still seem determined to make housing and financial policy as though the bubble is not there. They talk about stabilizing housing prices without distinguishing between markets where the bubble is still deflating and those markets in which house prices are consistent with fundamentals.
It would be difficult to believe that our top economists can still be so incompetent, but among economic policy makers, blindly following the conventional wisdom seems to be a job requirement. Even if this policy leads to yet another disaster, those responsible are unlikely to face any serious consequences. The taxpayers, homeowners, and job losers are the ones who pay the price of the economists' mistakes.
And what is that conventional wisdom that economic policy makers even now cannot escape from? Read a few paragraphs (c'mon, I know you can do it!) of angry econ wonk Jeremy Grantham (emphasis added):
The Story So Far: Greed + Incompetence + A Belief in Market Efficiency = Disaster
Greed and reckless overcon?dence on the part of almost everyone caused us to ignore risk to a degree that is probably unparalleled in breadth and depth in American history. Even more remarkable was the lack of insight and basic competence of our leadership, which led them to ignore this development, or worse, to encourage it. Ingenious new financial instruments certainly facilitated and exaggerated these weaknesses, but they were not the most potent ingredient in our toxic stew. That honor goes to the economic establishment for building over many decades a belief in rational expectations: reasonable, economically-induced behavior that would always guarantee approximately efficient markets. . . .
The dominant economic theorists so valued orderliness and rationality that they actually grew to believe it, and this false conviction became increasingly dangerous. It was why Greenspan and Bernanke were not sure that bubbles - outbursts of serious irrationality - could even exist. It was why Bernanke, who had studied the bubble of 1929, could still not see it as proof of irrationality and could still view the Depression (à la Milton Friedman) as a mere consequence of incredibly bad, easily avoidable policy measures.
Of more recent importance, it was why Bernanke could dismiss a dangerous 100-year bubble in U.S. housing as being nonexistent. It was why Hyman Minsky was marginalized as an economist despite his brilliant insight of the "near inevitability" of periodic financial crises. It was why the suggestion in academic circles of stock market inefficiencies, let alone major dysfunctionality, was considered a heresy. It was why Burton Malkiel could rationalize the 1987 crash as being an efficient response to 12 or so triggers. These triggers, however, had a trivial weakness: seasoned portfolio managers at the time had never even heard of most of them. Never underestimate the power of a dominant academic idea to choke off competing ideas, and never underestimate the unwillingness of academics to change their views in the face of evidence. They have decades of their research and their academic standing to defend.
The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all. It left our economic and governmental establishment sitting by con? dently, even as a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives, and wickedly complicated instruments led to our current plight. "Surely none of this could happen in a rational, efficient world," they seemed to be thinking.
If you understood the above and how it links together, you understand the deep (and horribly hard to pull out) intellectual roots of our long-brewing and now fully blown economic crisis, and the willfully, probably corruptly ignorant response to it. The only thing that will break the intellectual headlock we're in is if the present measures, despite their enormity, don't work. Even then . . . |
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