I don't trust the economic system at all... (4.00 / 5)

...and yet I think the plan will work.  Why?  Geithner has cleverly utilizing their greed to essentially bail themselves out... by encouraging them buy out the crap that's clogging the system.  Greed is a powerful motivator, probably the only motivator for them... turning the greed around to actually fix the problem greed caused is very clever, and rather appropriate, IMO...

The big problem with perception of the plan is distortion of the facts.  Someone here reported that the government loan would be for 97% of the value, then you look at the story on bloomberg and they report that it's only 50%.  Who is reporting the right amount?  I don't know... and that's a big source of the confusion at the moment.


REID: Voting against us was never part of our arrangement!
SPECTER: I am altering the deal! Pray I don't alter it any further!
REID: This deal keeps getting worse all the time!

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by: lord_mike @ Mon Mar 23, 2009 at 17:47:03 PM UTC

Trust them to be greedy (4.00 / 2)

Gotta admit, no one will argue with trusting these guys with being greedy.  So I think you counter Chris' main argument fairly well.

But this still assumes Geithner calculated the ratios correctly.  Do the greedy bastards have enough skin in the game or is the upside too great?  But yes, I trust them to be greedy.

Technically, re-regulation is another matter.  If I knew for sure we really were going to re-regulate correctly, undo the laws of 1999 and 2000 letting banks do anything they want, and so on, I'd feel much more confident about this plan.

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by: Mark Matson @ Mon Mar 23, 2009 at 18:09:13 PM UTC

[ Parent ]

There are reports of significant new regulations down the pike... (0.00 / 0)

I think they are to be announced later this month, but don't take my word on that...

REID: Voting against us was never part of our arrangement!
SPECTER: I am altering the deal! Pray I don't alter it any further!
REID: This deal keeps getting worse all the time!

---

by: lord_mike @ Mon Mar 23, 2009 at 18:30:10 PM UTC

[ Parent ]

this is what I think the answer is (0.00 / 0)

Havng written a rant on Blue Jersey last night, and then looked at the Treasury fact sheet today.

Most of the money is FDIC insurance.  If you don't count it, then it may be true that the TARP-private money is 50-50, but if you do count it, then we're back at the 95%-ish.

New Jersey politics at Blue Jersey.

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by: Hopeful in NJ @ Mon Mar 23, 2009 at 18:13:05 PM UTC

[ Parent ]

Not sure on that... (0.00 / 0)

Only $100 billion of TARP money is being used which is nothing... I realize that a lot more is coming from the FDIC and FED, but, we are going to have to wait and see how these play out...

REID: Voting against us was never part of our arrangement!
SPECTER: I am altering the deal! Pray I don't alter it any further!
REID: This deal keeps getting worse all the time!

---

by: lord_mike @ Mon Mar 23, 2009 at 18:31:48 PM UTC

[ Parent ]

here is their example (0.00 / 0)

http://www.treasury.gov/press/...

It plainly says for a mortgage bought at $84, $6 comes from private investors and the rest is from the government, mainly the form of FDIC. (That's obviously in order to evade Congress.) 6/84 = 7%, so the NYT weekend article was accurate that the government provides nearly 95%.  On the other hand, if you don't count the FDIC, then there are only $6 from TARP and $6 from private investors, or 50-50.

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector  in this example, $84  would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis  using asset managers approved and subject to oversight by the FDIC.

New Jersey politics at Blue Jersey.

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by: Hopeful in NJ @ Mon Mar 23, 2009 at 19:24:37 PM UTC

[ Parent ]

Plan good, system fucked (4.00 / 1)

Like Lord Mike, I think Gaithner's plan is the best of the available options even though I think the current crisis is far from a blip.

In this, I am agreeing with Obama, who has consistently said we need deep reform to change the speculative, boom/bust culture of Wall Street and has begun to roll out concrete proposals to do so.

Bowers, I applaud you for admitting you don't really understand this stuff well enough to have an opinion.  But then you express a seriously misinformed opinion about the dynamics of the debate.

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by: dcdanny @ Mon Mar 23, 2009 at 18:47:17 PM UTC

[ Parent ]

The 97% number looks to be right (4.00 / 6)

I don't for a minute believe the 50% number. I don't think any private parties would go for that. They all know this toxic waste is worthless. So why would they risk that much money and risk a revolt by their shareholders?

Unceremoniously lifted from the terrific blog, "naked capitalism," is this comment from a knowledgeable reader:

Say I am SAC Capital. I get to be one of the bidders on bank assets covered by the program

Citi holds $100mm of face-value securities, carried at $80mm.

The market bid on these securities is $30mm. Say with perfect foresight the value of all cash flows is $50mm.

I bid Citi $75mm. I put up $2.25mm or 3%, Treasury funds the rest.

I then buy $10mm in CDS directly from Citi [or another participant (BOA, GS, etc)] on the bonds for a premium of $1mm.

In the fullness of time, we get the final outcome, the bonds are worth $50mm

SAC loses $2.25mm of principal, but gets $9mm net in CDS proceeds, so recovers $6.75mm on a $2.25mm investment. Profit is $4.5mm

Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program)

U.S. Treasury loses $22.75mm

Great program.

It's just a scheme to transfer losses from the bank to the taxpayer with an egregious payout to a middleman (SAC) to effectively money launder the transaction.

You've also transmuted a $30mm economic loss into a $36.75mm economic loss because of the laundering. So its incredibly inefficient.

How did fraud and money laundering become the national economic policy of the US?

One would have to be a criminal to participate in this.

http://www.nakedcapitalism.com...

Put that way, it sure makes sense, doesn't it?

"More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly." -Woody Allen, My Speech to the Graduates

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by: Emocrat @ Mon Mar 23, 2009 at 18:49:46 PM UTC

[ Parent ]

Trust (4.00 / 1)

I certainly don't trust the people that got is into this mess but that's pretty much beside the point.  Corporations (and the people that run them) are going to act in their own self-interest.  The key is to put in place the right system with the right incentives and laws to make this behavior work for the greater good.

I'm very interested in arguments about why this will or won't work. But I'm very frustrated by the argument that we can't trust "these people." As Obama said the other night, the real problem is that most of what they did was legal. "These people" will behave based on the system and incentives that were in place and the fundamental problem was the lack of regulation, not all of the "bad people" that work at these companies.

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by: charliet @ Mon Mar 23, 2009 at 17:58:41 PM UTC

their interests are not our interests, & rewarding them & propping this all up harms us -- (4.00 / 4)

it's very clear, and the majority of Americans knows it.

even if this works, it doesn't work for us or our needs -- in every single way.

there are plenty of regulations that are not enforced ever -- and this toxic plan is not regulated either. In fact, we see the administration pushing to stop new regulations even now, with their trying to kill the bonus tax and Treasury and Fed still not disclosing anything.

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by: amberglow @ Mon Mar 23, 2009 at 18:34:43 PM UTC

[ Parent ]

Best arguement in favor (4.00 / 4)

Based on what I've read, I've seen a pretty good arguement in favor of this plan.

1) The alternative is nationalization, which will cost trillions of dollars and require congressional approval.  Until we know for absolute solid fact that one or more of these large corporations is insolvent, this simply won't happen.

2) If a bank is unwilling to sell even at the higher prices  this plan allows, then we know that bank is not solvent.  Their is no realistic way this plan will undervalue the assets.

3) If this plan overvalues the assets and the government absorbs the cost, this is the same cost that would be required through nationalization anyway.  If we have to nationalize after the fact, this won't add to the overall price tag.

4) Obama and Geithner can implement this plan without congressional approval.

The worst case scenario is the plan works from the banking prospective, the assets are sold, but the loans default and we end up eating the full cost.  While this would cost no less than nationalization (probably, though it could) it leaves the greedy bastards in charge.  Now, I can live with that if solid banking regulations are put back in place and the various bank divisions are broken down into their components that never should have been allowed to operate under one corporation.  But we'll see.

As a final point, people keep discussing whether the assets are under or over valued as if that is an isolated question.  It is not.  The value depends upon (home prices)x(default rate).  If no one defaults, home prices don't matter because everyone just pays their mortgage.  The more defaults, the more home prices matter.

Both home prices and default rates, especially default rates, can be largely influenced by government action.  The bankruptcy rules modification Obama wants, for example, will help tremendously in setting a more predictable value for the assets.  As another example, more progressive legislation on every front, including health care, will make defaults less likely.

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by: Mark Matson @ Mon Mar 23, 2009 at 18:00:13 PM UTC

Could you talk me (0.00 / 0)

through #2 using only little words?

I'm a bit of an economic idiot. How do we know they're not solvent if you won't sell at even higher prices?

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by: Joel @ Mon Mar 23, 2009 at 18:35:33 PM UTC

[ Parent ]

Assumptions (4.00 / 3)

A bank is insolvent if its liabilities (dept) are larger then its assets.  Right now the banks would be insolvent if the value of all their assets were believed to be the price they could actually sell them for.  However, the banks claim the assets are worth more than that, they just need to wait out this period of time.

This plan does all it can to overvalue these assets (or correctly value them, according to Geithner).  If the banks can sell these assets and still remain solvent, they will.  If, however, they are still unwilling to sell them, it means the assets really are not worth enough to cover the bank's liabilities, thus the bank is insolvent.

Note that some, like this diary at dKos claim the real problem is liabilities, not assets, but ultimately that doesn't change the numbers any.  (Reminds me about arguments over whether offense or defense is more important in sports; both are exactly equally important by definition!)  Either the assets are enough to cover the liabilities, or they are not.

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by: Mark Matson @ Mon Mar 23, 2009 at 18:50:57 PM UTC

[ Parent ]

Many thanks! (0.00 / 0)

Pretty much exactly what Kevin Drum is going on about here, then?

I'm starting to get a little less panicked about this plan. Of course, my ignorance is still near-total. But at least a few intelligent people are defending it, as Chris says. And while they perhaps might trust more than I do, that's not nothing.

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by: Joel @ Mon Mar 23, 2009 at 18:56:11 PM UTC

[ Parent ]

Drum (4.00 / 1)

Yeah, I was reading Drum earlier.

For those that think I'm just defending Obama, note that I was in a near panic over the weekend as well.  While I'll concede it may be wishful thinking on my part, I feel much better today then Saturday.

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by: Mark Matson @ Mon Mar 23, 2009 at 19:03:49 PM UTC

[ Parent ]

Bad analogy (0.00 / 0)

On offense vs defense. Wherever the point is to score more than your opponent, superlative defense NEVER loses, while superlative offense can.

Here's what I mean: if your pitching staff gives up no runs, you will never lose. You can't lose unless your opponent scores--and it's eminently humanly possible to prevent scoring on defense.

The same is not true of offense--you can score 100 runs, but your foe can score 101. There is always one more run that can be scored over what you have to win--but you can't allow -1 runs.

Look and see how many teams lost who scored 10+ runs, or even 15 or 20. It's happened. But no team has ever lost allowing zero runs (which happens all the time). That's why defense is more important.  

Help us Optimize McCain! Use these widgets to make it crazy-easy...

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by: torridjoe @ Mon Mar 23, 2009 at 19:12:26 PM UTC

[ Parent ]

Proves my point (0.00 / 0)

See, it really does sound like that conversation!

If defense is the most important thing to winning a game, then the best strategy is to prevent the opponent from implementing that defense successfully.  I think there's a name for that...

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by: Mark Matson @ Mon Mar 23, 2009 at 20:25:50 PM UTC

[ Parent ]

Not true (0.00 / 0)

You're not making logical sense. The best strategy is never to attempt to thwart your opponent, over active steps to defeat him. It also ignores the specifics of baseball, which command that a pitcher has much more power to prevent hits, than the batter does to create them. By the same token, a human defender is much better able to move to capture a batted ball, than a hitter is to make the ball avoid all defenders.

All of which explains why it's a bad analogy, but doesn't address the fundamental logical flaw: there is a perfect defensive score (zero), but offensive scores are potentially infinite. Executing the former guarantees a win. Executing the latter doesn't come close.  

Help us Optimize McCain! Use these widgets to make it crazy-easy...

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by: torridjoe @ Mon Mar 23, 2009 at 22:05:58 PM UTC

[ Parent ]

Offense versus Defense (off topic) (0.00 / 0)

All this is a bit off topic, but...

1) I never brought up baseball specifically.  In fact, the only sport I actively watch is basketball, which is what I tend to think of.  I'll grant this changes my thinking a bit, but still don't think it leads to the same conclusion you came to.  More later...

2) Note that you aren't actually arguing that defense is better than offense, you are arguing that perfect defense is easier then perfect offense.  

I will grant you that a great pitcher has more impact on a game then a great batter.  I'll also grant you that a team is better off focusing on pitching (though I don't follow baseball, so I'm just guessing).  But that is all about efficiency in how one spends money, which is not the same conversation.  In basketball, you get a different effect and a zero score is not ever going to happen.

3) You are confusing not losing with winning.  They are not the same thing.

4) You are confusing average with standard deviation.  (Yes, I know, you don't use those terms.)

5) You are confusing a perfect ability with a perfect score.

Let's look at points 3 and 4 with your main arguement:

there is a perfect defensive score (zero), but offensive scores are potentially infinite. Executing the former guarantees a win. Executing the latter doesn't come close.

The lower the score average, the lower the standard deviation, thus if you can guarantee a zero score there is no deviation at all.

Higher scores have higher standard deviations, as there is very little difference between scoring 99, 100 or 101, statistically.

What does this mean?  Well, lets assume two team have defenses that are nearly perfect.  Mathematically, they are approaching an infinite limit.  The result is neither team ever scores.  No one wins.  Depending upon the sport, this becomes a tie or draw.

If two teams approach infinitely perfect offenses, they both run up very, very high scores.  The standard deviation is quite high and the winner will basically be random.

So defense results in a draw, offense results in 50/50.  Statistically, both mean the same thing.  The actual meaning in terms of league play would depend upon the sport.

Offense versus defense, the two cancel assuming both approach perfection at the same rate.  Mathematically, though, the limit could have a value if the rates are different, say defense approaches infinite perfection at X^2 but offense only at X, then you would be correct.

Now this gets back to your baseball assumption, a sport where 1) zero scores are possible and 2) ties are not allowed.  Perhaps you have a point.  Certainly the zero score breaks the symmetry.

On the other hand, zero is the lowest score you can have.  In other words, having a defense better than required to obtain a zero score is waisted.  If you could chose, you would rather put that effort into offense, which has no upper limit.

So, after typing way too much in an off topic post, I'll admit that your symmetry breaking arguement challenges my simple picture, which was purely based on symmetry.  I still think you are probably wrong, as each swing of the bat is its own role of the dice and we are really talking statistics, here.  The symmetry breaking of the game score does not the mean the statistics of each bat/possession changes, but I'm not completely sure.

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by: Mark Matson @ Tue Mar 24, 2009 at 00:11:24 AM UTC

[ Parent ]

sigh (4.00 / 1)

again this question of value.  if they wanted to become marxists or sustainable development economists, they shouldn't have become bankers.  

i don't really understand all this either, but it seems like unless there is a market failure, which would be demonstrable, like if the p-e ratio for an entire sector is like 3 or something, i have a hard time believing that this is anything but a reflection of the continued political power of the financial sector even though they're broke.  otherwise they would be nationalized at low cost - like 0 -  rather than paid for their bad assets so they can be solvent and private without them.  

i mean if they're capitalists, why do they expect people to give them money without receiving anything in return?  Why aren't we getting shares in these companies at the price they're trading at now?  It seems purely ideological that this isn't happening and the result is that the taxpayers will get a huge bill for nothing while the private companies get to go back to pretending that they never do anything wrong.  It's pure arrogance, and it's disgusting.

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by: dr anonymous @ Mon Mar 23, 2009 at 22:35:56 PM UTC

[ Parent ]

You don't know. (4.00 / 7)

Because of the way the system is (not) operating, if the price isn't high enough, the bank holding the toxic asset is likely to simply not sell it (which is to no small degree what is already happening), preferring to keep it on their balance sheet at a fictional value (in order to make it appear that they might be solvent), and hope for another government handout while gambling in other markets in the hope that they can make good on the loss.  Thus, the question is not whether or not the plan will undervalue assets, because that's not the real problem to start with -- that's only a sop to try to convince tax payers that they are not going to get soaked by the PPP buying overvalued assets.

The real problem with the plan, as it seems to me, is that it keeps the real problem of "zombie assets" alive.  We currently have a number of zombie banks operating on the basis that they have assets on their books which are not worth (based on the market) 20 cents on the dollar; rather than recognizing these losses, the banks keep them on their books at inflated, fictional values (hence their desire to get rid of "mark to market" rules), so that no one can be certain that they really are insolvent.  "Better to remain silent and be thought insolvent, than open one's mouth and remove all doubt," to paraphrase an old saying.  

Mark Matson's theory, and the theory of this plan, is that, by creating an artificial market (funded by taxpayers and guaranteed by taxpayers), they will create a "real" market which will establish "real" prices for these zombie assets which are not "undervalued."  The thinking goes that, just as the market unfairly inflated the value of those assets two years ago, they are unfairly undervaluing those same assets now.  

The problem is that there is no proof of that, because there is no operating market for these assets.  Hence, we create the market, and that will demonstrate that these assets are really worth, say 50 cents on the dollar (or 80).  As I said above, one problem is that the banks might not be willing to sell these zombie assets even at a price that the artificial market would create for them.  

More fundamentally, however, is that the artificial market could easily overvalue these zombie assets.  The whole point of this artificial market is to create conditions under which these zombie assets, which cannot be sold now because the market places so little value on them, can be sold for enough money that the banks currently holding them will be willing to sell them (i.e., at a price that will make them solventonce again).  But that doesn't guarantee that this artificial market won't overvalue the zombie assets.  

It appears that the methods that are incorporated into this plan in order to try to keep the assets from being overvalued are 1) a 6-1 "risk" ratio (or capitalization requirement), and 2) that the private funds making the purchases have to put some of their own money in to "have skin in the game."  

As Jon Stewart said, It really pisses me off when these guys talk about this like it's some kind of game.  

The risk ratio might help create a more realistic market; but again, that kind of limitation might just exclude a lot of the zombified assets that the banks are trying to dump -- unless, of course, the parties involved do, again, what they've been doing for years; lie about the ratio in order to make the sale.  Saying they are going to put a 6-1 ratio limit on these assets assumes that there's going to be somebody actually looking at these assets to verify that there is not greater risk -- just like Standard & Poor was supposedly doing to these assets in the first place.  And since it's a lot of the same players involved, I'm skeptical that there's going to be any real close examination of these assets -- that just might make the whole "plan" self-defeating.

Additionally, with regard to the hedge funds having "skin in the game," if you put up $10 and I put up $1 so we can get a loan of $100 buy lottery tickets, and you guarantee that if we don't win the lottery, that you will pay the balance of the loan, I really don't have that much skin in the game, and I'm much more likely to buy the lottery tickets.  Hell, I might say, if you're willing to do that, I'll put up a $100, if you'll guarantee $1000; that way we've got a better chance of winning the lottery.  It's more reckless gambling with other people's (taxpayers) money.  At least, that's the way I see it.  And, that doesn't really change the amount of risk associated with losing the money invested (i.e., increase the likelihood of winning the lottery -- since the odds are millions to one, buying $1000 worth of tickets improves your chances of winning only very, very marginally).  

My final quibble is that I don't see that nationalization would require us to "eat the full cost" of the losses.  Nationalization, receivership, whatever you want to call it, would clear out the value of the stockholders first, and force these banks to try to raise money privately, and devalue a lot of these toxic assets.  

When American Airlines went through Chapter 11, I don't think the government had to make good on all their losses.

In short, I'm not convinced.  And that's not even considering that this whole thing is not subject to being open, transparent, and subject to review and approval by Congress.  

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by: Jbearlaw @ Mon Mar 23, 2009 at 19:31:25 PM UTC

[ Parent ]

Short version (4.00 / 1)

Geithner's plan is to replace AIG's role in the market with the FDIC: insuring investors against loss and thereby driving up the price of paper.

---

by: MadScientist @ Mon Mar 23, 2009 at 20:14:27 PM UTC

[ Parent ]

Loved the fact that you used a gambling analogy in this (4.00 / 1)

post

Fits the CDS environment perfectly

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by: Susan H @ Mon Mar 23, 2009 at 20:17:09 PM UTC

[ Parent ]

Nationalization (4.00 / 1)

My final quibble is that I don't see that nationalization would require us to "eat the full cost" of the losses.  Nationalization, receivership, whatever you want to call it, would clear out the value of the stockholders first...

True, but the stocks are so low now that this barely makes a blip on the overall cost.  It does prevent stockholders from gaining on public investment, though, which is a moral gain.  (Though some 401k holders nearing retirement may disagree.)

The lottery analogy is great.  I think the numbers are they put in $0.05, we put in $0.05 and we guarantee loans for $0.90, for a $1 lottery ticket.  If the lottery ticket wins, they get 95% and we get 5%, if it loses, they loose five cents and we loose 95 cents.

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by: Mark Matson @ Mon Mar 23, 2009 at 21:26:20 PM UTC

[ Parent ]

"Without Congressional Approval" (4.00 / 5)

That right there is exactly why this plan is untrustworthy; it is un-American.  The whole point of the American system of government is based on our inherent distrust of concentrated power:  Hence, the Founders created a system of "checks and balances."  This plan is once again designed to do away with any checks or balances upon the industry or the Treasury (a mere subdivision of one of the three branches of Government, the executive).  The Federal Reserve operates without Congressional oversight, because Congress forbade itself by statute the right to even so much as inspect the Fed's books; which is why Ben Bernanke can hand out Trillions in guarantees without telling us what he's doing, or who he's giving those guarantees to, or what is being guaranteed, etc.  

What we have now is a system without meaningful checks or balances on the financial sector.  The only significant check we've seen enacted in, literally, decades upon the financial industry is the 90% tax imposed on TARP bonus recipients.  And now you have the President of the United States saying on 60 Minutes that this check is unconstitutional (highly disingenuous from a Con Law Professor from Harvard).  

In short, there is no, repeat NO check on the financial system.  Not even (I shudder to agree with George Will, but then again, Robert Reich said the same thing yesterday) markets, which are not being allowed to operate, because the unchecked Executive Branch is handing out guarantees (i.e., money) without congressional approval.  Whatever happened to the "power of the purse?"  

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by: Jbearlaw @ Mon Mar 23, 2009 at 18:41:53 PM UTC

[ Parent ]

Congress is worthless.... (0.00 / 0)

You have 40% of congress who actively is rooting for the country to fail, and the other 60% are scared of their own shadow.  Then you have the public who thinks that bankrupting the economy and shutting down the government is a somehow a good idea 'cos it's more important to punish people they don't like than actually get jobs....

The strength of this plan is that we are bypassing a legislative body that doesn't know what its doing and helped us get into this mess in the first place!.  

REID: Voting against us was never part of our arrangement!
SPECTER: I am altering the deal! Pray I don't alter it any further!
REID: This deal keeps getting worse all the time!

---

by: lord_mike @ Mon Mar 23, 2009 at 18:53:00 PM UTC

[ Parent ]

Worthless, or not (4.00 / 5)

The Congress has a Constitutional role in our government, I'm a bit hesitant to just "forget" about that when they are not performing as expected.

It gets right back to the "trust" issue, though, huh? Who do you trust? Should we depend on the process, i.e. the Constitution, or take bolder actions that might not be exactly kosher with respect to out founding documents?

Its a sticky wicket, no matter how you slice it.

Trust, or lack thereof, is around every corner.

My main lack of trust is in these nit wits that every body seems to falling all over themselves to retain, you know that same folks that "wound up" all the crap that's smouldering on the ShitPile, I'd feel much better is a few of them either came clean in public, or simply resigned.

Same may go for the likes of Geithner, Summers, et al., but I fear we're stuck with those dudes.

"It sounds wrong...
     ...but its right."

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by: SpitBall @ Mon Mar 23, 2009 at 19:29:37 PM UTC

[ Parent ]

sounds like you'd be one of the first (0.00 / 0)

to applaud the president assuming dictatorial powers and usurping the functions of the legislative branch.

No offense meant, but that's what you sound like with that comment.

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by: limpidglass @ Mon Mar 23, 2009 at 20:26:49 PM UTC

[ Parent ]

No, but there is a reason why we have an executive branch... (0.00 / 0)

If we didn't, nothing would get done.  I'm surprised that parliamentary systems manage to get anything accomplished....

REID: Voting against us was never part of our arrangement!
SPECTER: I am altering the deal! Pray I don't alter it any further!
REID: This deal keeps getting worse all the time!

---

by: lord_mike @ Tue Mar 24, 2009 at 02:02:42 AM UTC

[ Parent ]

#2 is only relevent (4.00 / 1)

where banks are not marking to market or in some way not marking down the assets.  If they are carrying these on the balance sheets at their historic cost, you are right, but I don't think many are.  

Getting rid of these assets elminates the risk of further write downs, and it is that fear that is hammering the banks stock prices.  

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by: fladem @ Mon Mar 23, 2009 at 20:18:12 PM UTC

[ Parent ]

when will reality check in? (4.00 / 2)

reading DeLong's and Krugman's (and others) arguments, it does seem that for now, it comes down to a set of beliefs. do you believe these assets have an inherent value greater than what you could get for them now? do you think it's a confidence problem or a solvency problem?

what i wonder is, is there a point when we will know the answer to that? Jamie Galbraith says that "[t]he way to find out who is right is to EXAMINE THE LOAN TAPES", which sounds good. but the reality distortion field in DC is pretty strong, and facts are fluid things for them. so i don't know if interpretation of financial info is sufficient.

i'm assuming that Obama's plan being correct will be pretty obvious. if banks start lending and the economy recovers, he was right, or at least, it didn't matter. so really, the question is, what will it take to get them to say "we were wrong" if they are?

there'll be some people who will never accept error, of course. some people still swear that there really were WMDs in Iraq, but They smuggled them out or sold them to Red Lectroids or whatever. but for now, even in DC, generally most people accept that, no, there weren't any.

so what's the equivalent here? do we have to go through with Paulson's Geithner's plan and see it not working? will they just redefine "working" to match whatever they will claim is happening? will it take some kind of catastrophic cratering that can't be papered over or denied?

or will we just zombie along having this same argument over and over for the next three years?

not everything worth doing is profitable. not everything profitable is worth doing.

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by: tatere @ Mon Mar 23, 2009 at 18:02:52 PM UTC

should it work? (4.00 / 9)

Aside from the "it won't work" and "it will work" groups there is also the "it will work but other alternatives are better" group. Let's say we re-inflate the pre-crash economy and go back to the same basic game and the same rules. Is that what we want? So in addition to deciding how best to restart the economy we need to really look at what kind of economy we want in the end. Even if you get a quick recovery (which Obama and everyone else would be happy about) but the basic rules are all the same it will be very difficult to get support for a big change to the rules. Now is the time to make those structural changes.

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by: tremayne @ Mon Mar 23, 2009 at 18:23:02 PM UTC

this is a very key point. my opinion is that it isn't an either/or... (4.00 / 1)

it may be easier to restructure the economy after the current crisis has been partially overcome/averted.  the alternative, it seems to me, is for the global economy to get much worse, a la the great depression, and then be restructured along new lines.  i don't see a restructuring taking place now, when the economy is on something of a brink....  

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by: seabrook @ Mon Mar 23, 2009 at 19:21:50 PM UTC

[ Parent ]

On reason (4.00 / 3)

the old game is never coming back is that CDO's will never get the price they once received.  Everyone now knows that the risk is far higher than once thought.

We are still missing, though, a thorough assessment of the transparency problem.  The financial statements of companies are not accurately reflecting the true state of the balance sheets of corporations. This means re-thinking from the ground up how corporations disclose information to the financial markets.

Also missing are regulations limiting the amount of leverage - though I hope those are coming.    

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by: fladem @ Mon Mar 23, 2009 at 20:09:27 PM UTC

[ Parent ]

I think you're confusing economic with political considerations (4.00 / 6)

Here's DeLong's take on his difference with Krugman:

So why do I have a positive and Paul a negative view of the Geithner Plan? I see three reasons:

1. The half empty-half full factor: I see the Geithner Plan as a positive step from where we are. Paul seed it as an embarrassingly inadequate bandaid.

2. Politics: I think Obama has to demonstrate that he has exhausted all other options before he has a prayer of getting Voinovich to vote to close debate on a bank nationalization bill. Paul thinks that the longer Obama delays proposing bank nationalization the lower it's chances become.

3. I think the private-sector players in financial markets right now are highly risk averse--hence assets are undervalued from the perspective of a society or a government that is less risk averse. Paul judges that assets have low values beceuse they are unlikely to pay out much cash.

http://delong.typepad.com/sdj/2009/03/i-think-paul-krugman-is-wrong.html

His first reason is half economic-half political, his second reason is political, his third reason is economic.

On the third, purely economic reason, DeLong puts more faith in the market than Krugman does. Geithner's plan basically amounts to a shell game, moving the money around fast enough that the market is confused into actually assigning a value to the "troubled" assets. DeLong thinks that will work. Krugman says that by putting a big no-strings-attached government loan out as a bribe, you're basically guaranteeing that the market will overvalue the assets.

That leads to DeLong's first point, that whether or not the bribed market overvalues the shitpile only affects the amount of government loss: the program will take some of the shit out of the pile which is better than just letting all the shit fester. That's basically true: it may be a relatively expensive way to cure the financial industry problems, but it does address those problems.

That then leads to the political considerations: 1) whether government action right now should primarily be to get the economy moving, or whether government should be re-engineering the economy at the same time; and 2) whether the current Obama plan creates or destroys political capital.

I think the economic differences are a minor part of the Krugman-DeLong divide on this one. Mostly, it's the political differences: Krugman really does think the Wall Street-centric economy has to be replaced, and sees anything that props up that system as counterproductive. DeLong probably thinks that whatever works is worth doing, and it is not government's role to decide what works (see his post comparing Wall Street and Silicon Valley compensation schemes: he's looking for ways to alter the incentives on Wall Street, not ways to start over).

But the biggest divide is over whether Obama's actions now are creating or destroying opportunities to do more later. DeLong thinks they are, Krugman thinks they aren't. Krugman's more of a populist than DeLong is. Krugman looks at Geithner and says "How can this possibly be increasing Obama's approval rating." DeLong looks at Geithner and says "He's trying everything possible under the old paradigm - if it doesn't work, then more people will be willing to throw out that paradigm later."

My own feeling is that DeLong's should pay more attention to the first part of his post itemizing his differences with Krugman:

I Think Paul Krugman Is Wrong
I find that a scary sentence to write. If the past decade has taught me anything, it has taught me that mistakes are avoided if you follow two rules:

1. Remember that Paul Krugman is right.
2. If your analysis leads you to conclude that Paul Krugman is wrong, refer to rule #1.

Krugman made a lot of good calls during the Bush administration because he refused to accept the idea that you might as well try the other side's idea to get something done now because it will either work or it will increase your chances of doing it your way later. That was a fallacy that helped pass NCLB and AUMF among many other things that the Democratic Party has lived to regret. It's closely related to the preemptive compromise fallacy that Obama used to develop his approach to the health care crisis and the stimulus bill.

I don't think there's a real difference between DeLong and Krugman on the economic merits of the Obama/Geithner approach - both acknowledge that it won't get the job done. The difference is over how to approach the inevitable negotiations and the value of incrementalism. The question isn't whether the Geithner plan will "work" in an economic sense, but whether it will "work" in a political sense: will it expand or reduce the ability of Obama to take further big actions later? It's hard to see after last week how anyone can argue that the Obama/Geithner approach is good for Obama's future prospects, but that's fundamentally what DeLong is arguing, and what Krugman is assailing.

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by: MadScientist @ Mon Mar 23, 2009 at 18:44:47 PM UTC

Where DeLong says the plan is too small (4.00 / 1)

To back up my contention that DeLong and Krugman both agree that the Geithner plan isn't big enough, and relies on creating future opportunities for greater government intervention to actually "work":

The Geithner Plan FAQ

A: No. Our guess is that we would need to take $4 trillion out of the market and off the supply that private financial intermediaries must hold in order to move financial asset prices to where they need to be in order to unfreeze credit markets, and make it profitable for those businesses that should be hiring and expanding to actually hire and expand.

Q: Oh.

A: But all is not lost. This is not all the administration is doing. This plan consumes $150 billion of second-tranche TARP money and leverages it to take $1 trillion in risky assets off the private sector's books. And the Federal Reserve is taking an additional $1 trillion of risky debt off the private sector's books and replacing it with cash through its program of quantitative easing. And there is the fiscal boost program. And there is a potential second-round stimulus in September. And there is still $200 billion more left in the TARP to be used in other ways.

Think of it this way: the Fed's and the Treasury's announcements in the past week are what we think will be half of what we need to do the job. And if it turns out that we are right, more programs and plans will be on the way.

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by: MadScientist @ Mon Mar 23, 2009 at 18:57:57 PM UTC

[ Parent ]

#2 (4.00 / 1)

The one area I feel very confident Krugman is wrong is on #2.  I think if this plan fails it will be much easier to nationalize the banks then it is right now.

As good as Krugman is at economics, he has never proven himself all that good at politics.

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by: Mark Matson @ Mon Mar 23, 2009 at 18:58:25 PM UTC

[ Parent ]

Fair enough (4.00 / 3)

That puts you aligned with DeLong.

For my part, I don't see that it's easy to nationalize now, but I think that the Geithner plan will make it even harder in the future. The Geithner plan allows more and more opportunity for corporate graft like the AIG bonuses, thereby allowing more and more opportunity for Republican populism to undermine Obama's already weak ability to command the necessary cohesion in the Senate.

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by: MadScientist @ Mon Mar 23, 2009 at 19:05:57 PM UTC

[ Parent ]

In the argument you quote from DeLong (4.00 / 4)

his lack of emphasis on #3 as being the decisive difference between him and Krugman indicates he doesn't get the force of Krugman's argument.

From Krugman's point of view, it seems pretty clear that the absolutely key factor that militates against any solution like Geithner's and that of the "Swedish approach" of temporary nationalization is whether or not those asset values have any likelihood of a great appreciation from their current low state in a reasonable period of time. Essentially, it is the question of whether the real estate bubble was a real bubble or simply a relatively minor temporary inflation.

If, in fact, the bubble was so great that there is no reasonable prospect of those asset values rising to anything like their previous levels in a reasonable amount of time, then the Geithner plan will fail, no matter the details of how it is implemented.

That, I'm sure, is at the basis of Galbraith's loud insistence that we be able to review the loan tapes. Those tapes tell the tale of what kinds of deals lie beneath the toxic assets, and how much dependency there might be on an assumption of returning values for real estate that have no real prospect of coming about.

I'm somewhat familiar with some areas in California where the foreclosures have been very high, and where the real estate was bought by people who were granted mortgages but had no good prospect of paying the mortgages because of insufficient income. The real estate values in those areas have gone down by half in many cases. I just can't see how the value of that real estate might go up to even three quarters of its previous status, given the facts of the areas. These are development areas where land itself is relatively cheap. The current supply greatly overwhelms the number of people who can buy, based on a realistic assessment of their ability to pay. I just don't see how that changes any time soon.

How many such properties lie behind the toxic assets? I don't know, but my guess is they represent a very significant proportion of those assets. Again, this is why we need to know what's in the loan tapes, because that will make clear what the real risks are. This is called being reality based.

If the underlying loans are bad in this way -- being based on a bubble and extended to borrowers only assuming the bubble would continue, not due to their own financial worthiness as borrowers -- then attempts to instill confidence in the markets will fail to make the problem go away.

Now Krugman is of course wickedly smart. But he is certainly capable of error. While he is plunking pretty down hard on the side that the toxic assets are based on a bubble that can't be reinflated, he might, in principle, be wrong about this.

An examination of the tapes could put some real starch in his assumption -- or show it is likely ill-founded.

But I think if DeLong doesn't recognize that the most important difference between him and Krugman is the question of this economic fact, then he's just misunderstanding both Krugman and the real economic situation.

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by: frankly0 @ Mon Mar 23, 2009 at 19:23:27 PM UTC

[ Parent ]

Just to elaborate a bit (4.00 / 1)

on one point I made.

Suppose that in many areas of high foreclosures, the bubble was driven by demand by people who should never have been allowed a mortgage of any size because they didn't have anything like an adequate income.

If so, then how does even making credit easier to get than it is at this moment, while making sure that people are truly credit worthy -- allow real estate values to return to anything like their previous levels? There simply will be far fewer buyers for these properties than previously -- with such ample supply, the prices will stay very low.

I don't see how one gets around this inherent problem. The only question is how large a factor it plays in the current toxic assets.

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by: frankly0 @ Mon Mar 23, 2009 at 19:32:12 PM UTC

[ Parent ]

you're correct that it doesn't (4.00 / 1)

what i think they're betting on is that if they same the creamy layer at the top of the economy (i.e. the financial sector), then the base of it (i.e. the consumer base) can go to hell for a while and they'll deal with that afterwards after there isn't an immediate threat.  Another way to put this is that they think there is a greater likelihood of bank failures and loss of investor confidence than there is of a social revolt (a real one).

However, I think whether or not they can succeed at this game depends on the size of the underlying economic crisis - if credit card debts, mortgages, etc etc etc continue to go bad and the government runs out of the ability to credibly print money (i.e. raise debt) to give to companies, then what?  The question, I think, is whether they know what they're doing and are pursuing a soft landing or whether they are clueless and are about to muddle through and make messes.

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by: dr anonymous @ Mon Mar 23, 2009 at 22:59:19 PM UTC

[ Parent ]

I think you're making this unnecessarily complicated (4.00 / 2)

The Geithner plan basically has the FDIC filling the role that AIG filled over the past decade: insuring wildly over-leveraged bets against loss.

I think DeLong and Krugman both recognize that. DeLong thinks there's a big upside to doing this in allowing the government to do more later. Krugman thinks there's a big downside to this in preventing the government from doing more later. Neither expects the Geithner plan alone to solve the problem.

The difference between DeLong and Krugman over the real value of the assets (DeLong says they're undervalued, Krugman says we don't know) is a minor part of their motivation for favoring/hating the Geithner plan. Whether or not the assets are undervalued has little bearing on whether it's a good idea to have the FDIC playing the role of AIG.

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by: MadScientist @ Mon Mar 23, 2009 at 20:10:52 PM UTC

[ Parent ]

Undervalued or not (4.00 / 1)

I actually think whether the assets are undervalued or not is the wrong way to think of it.  (This is dangerous of me, because now I seem to be disagreeing with Krugman on economics, but bear with me.)  The question is whether the correct value is high enough to make the banks operable and solvent.

Quite honestly, my guess is the assets are undervalued right now but not by enough to make the banks solvent.  If I'm right, (and Geithner's plan doesn't overvalue the assets too much, a big if) this plan will "fail" in the best possible way, the banks won't be willing to sell at the prices offered and the path to nationalization will be clear.

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by: Mark Matson @ Mon Mar 23, 2009 at 20:22:49 PM UTC

[ Parent ]

Actually, no (4.00 / 1)

The question is whether or not it's a good thing for the FDIC to play the role of AIG in insuring big bets in order to drive up the price of paper. DeLong and Krugman are in agreement that it won't on its own drive up the price of paper sufficiently to make the banks solvent. DeLong puts numbers on this, saying it's $1 trillion out of a $4 trillion problem.

If the FDIC filling AIG's role allows the government to extricate itself from AIG, that's probably a good thing. But overall, I agree with Krugman in wondering why this sort of shenanigan is supposed to increase Obama's credibility on the economy.

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by: MadScientist @ Mon Mar 23, 2009 at 20:48:41 PM UTC

[ Parent ]

i think you're getting it backwards (4.00 / 1)

The question is whether the correct value is high enough to make the banks operable and solvent.

The reality is that, from a social perspective, as long as the u.s. is committed to emerging out of this crisis with free market capitalism, these two values are tautologically equivalent.  there is no "absolute" correct value-- if there were, then this whole exercise would be as objective as the sun and we wouldn't have to fuss over things :)  

The question is rather how this state of being of the "correct value" (or rather, how the banks will manage to trade off liabilities for assets) will be arranged and how much it will cost to get there and who will have what wealth and what power by the end.  In that sense, perhaps the price of the things they get rid of might go up and perhaps it might go down and perhaps it is negative nad perhaps it is positive, but it is irrelevant to the social question of maintaining a form of capitalism.

err, I think.

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by: dr anonymous @ Mon Mar 23, 2009 at 22:48:47 PM UTC

[ Parent ]

Actually (4.00 / 1)

I think it's your analysis and DeLong's that's making things more complicated than they are. As I said, I think that Krugman's most basic objection by far is a purely economic one. I was simply elaborating on that economic point.

Krugman's pretty clear about it in his latest column:

But the real problem with this plan is that it won't work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus - for that is what the Geithner plan amounts to - will change that fact.

I realize that Delong tries to act as if the real difference between him and Krugman is way more complex than that. Delong wants for some reason to relegate the economic issue to #3 of 3 reasons. But I just don't see that in what Krugman himself is saying plain as day.  

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by: frankly0 @ Mon Mar 23, 2009 at 20:24:33 PM UTC

[ Parent ]

Yes, but DeLong doesn't disagree with Krugman on that point (4.00 / 1)

DeLong probably thinks that Geithner's plan will take more of the crap off the banks' balance sheets than Krugman thinks it will, and DeLong definitely thinks government stands to lose less than Krugman thinks (that's the point of DeLong's #3), but DeLong's main justification of the plan is that 1) it's a start in the right direction; and 2) it will allow Obama to do more later.

Economically, the two are in agreement that this won't solve the problem. Politically, they're on opposite sides. Krugman's also pretty clear about that in his column:

Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails - as it almost surely will - it's unlikely that he'll be able to persuade Congress to come up with more funds to do what he should have done in the first place.

This is where DeLong (and Mark Matson in this thread) stake out diametrically opposite positions to Krugman's, claiming instead that the plan will increase Obama's ability to do more later.  

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by: MadScientist @ Mon Mar 23, 2009 at 20:40:27 PM UTC

[ Parent ]

Credibility (4.00 / 1)

I think the key word in Krugman's graf is 'credibility'.  I think he is wrong that credibility is the most important aspect to getting nationalization, though.  The most important aspect, IMO, is need and available alternatives.  If this plan fails, there will be no other alternative.

Yes, Obama will roundly be criticized by some and this will be used to try to prove government can't do anything right, but the bottom line will shift the other way.  When all alternatives are tried and failed, we will go with the only one left.

Also, this could make nationalization "cheaper".  Not in reality, in all likelihood, but in terms of the cost of the congressional vote.  Money used to clean up the assets will be required in any scenario.  If some of it comes for "free" via congressionally unapproved loans, it means the money congress needs to approve will go down.

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by: Mark Matson @ Mon Mar 23, 2009 at 21:07:18 PM UTC

[ Parent ]

I find it to be a really (4.00 / 2)

remarkable argument that implementing a policy that one expects to be abject failure is the best way politically to enable the alternative, correct policy.

If Obama were to try to seek the correct policy first, get beaten down by opposition so that he can't implement it, then choose as an alternative an inferior policy, and then seize on its failure as proof that the original policy was needed, then that would make political sense.

But to choose the inferior policy deliberately, pronounce that it's the best policy and will solve the problem, come to see that policy fail miserably, and then claim that the other policy must be adopted, as if that is what one had in mind all the time? This is about as absurd as it gets as a deliberate political strategy. How much damage might be done to one's credibility on that issue or any other issue?

Yes, it's certainly true that if we do every bad thing possible, we are left only with the good alternative, and will in fact in that extremity adopt it. But how much damage will be done to the country, as well as to any political individual, party, or movement who espoused all the bad things?  

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by: frankly0 @ Mon Mar 23, 2009 at 21:41:58 PM UTC

[ Parent ]

Stress Test (4.00 / 1)

I get your complaint and to some degree agree with you.  Actually, I largely agree.  I'd still prefer seizing all the troubled institutions, muck around with their internal numbers and then partially recapitalize and release the working banks and put the insolvent ones through bankruptcy like proceedings.

But assuming we should only seize the truly insolvent banks, then we need to learn which banks are insolvent, first.  Near as I can tell, this plan will test the banks for solvency.  After this is over, some banks will be solvent and some will prove they are not.  Assuming I'm right about that (and I fully admit I'm not sure) then this is a good thing.

Also, I don't think this plan will do the harm you claim.  In fact, I'd love this to be an "abject failure" where the banks prove to be insolvent.  I'm actually most worried about the middle ground, where it sort of works but some loans default.  Might that just keep zombies walking a few more months?  I'm not sure.

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by: Mark Matson @ Mon Mar 23, 2009 at 21:55:18 PM UTC

[ Parent ]

Here, I think I agree with Krugman (4.00 / 1)

Where I thought I was disagreeing before about undervalued assets, it seems we actually agree.  The point that no amount of financial hocus-pocus will make lost money just magically reappear I also agree with.

The difference is I think this will lead to nationalization in most cases and Krugman thinks it will make that harder.

There is also some small probability the plan will work directly, and I suspect at least one bank will be saved that way.  The non-zero chance of upside shouldn't be completely ignored.  I don't think Krugman does, it is just he thinks the downside is overwhelming.

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by: Mark Matson @ Mon Mar 23, 2009 at 20:54:19 PM UTC

[ Parent ]

the costs to us are overwhelming either way is his point, i'd say -- (4.00 / 2)

and that should be our concern.

we lose whether banks win or lose.

we lose whether they go back to business as usual or not.

...

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by: amberglow @ Mon Mar 23, 2009 at 21:00:40 PM UTC

[ Parent ]

Agreed (4.00 / 1)

That goes back to my point above where I said:

The worst case scenario is the plan works from the banking prospective, the assets are sold, but the loans default and we end up eating the full cost.  While this would cost no less than nationalization (probably, though it could) it leaves the greedy bastards in charge.  Now, I can live with that if solid banking regulations are put back in place and the various bank divisions are broken down into their components that never should have been allowed to operate under one corporation.  But we'll see.

I've talked myself into supporting everything else, but this still worries me.  The banking system has to change.

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by: Mark Matson @ Mon Mar 23, 2009 at 21:12:37 PM UTC

[ Parent ]

they refuse to use any and all of the existing authority tho -- it's not at all likely that NEW (4.00 / 1)

regulations will eiher be wanted or fought for by this crowd.

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by: amberglow @ Mon Mar 23, 2009 at 22:59:49 PM UTC

[ Parent ]

So Chris, the choice is who to trust, is it? (0.00 / 0)

I am going to suggest the most radical of thoughts here. I may even be accused of being a "small d" democrat but here goes:

If the choice is between a few ivory tower economists selling columns every week who need headlines to keep people tuning in, versus the guy we just elected by close to 70 million votes President of the United States and put in power 62 days ago, hmmmmmmmmmmmmmm

Let's see, "chicken little", "sky is falling" Cassandras or the recently elected President of the United States.  

The Krugman dittoheads need to stop pretending they are only attacking the Wall Street faction of the President's economic team.  This is Barack Obama's economic policy.  He isn't being led around by the nose; he isn't "in bed" with Wall Street.  He is an intelligent, eminently reasonable and very skillful politician who knows what he's doing.

I vote for democracy over punditocracy!

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by: candide @ Mon Mar 23, 2009 at 18:49:31 PM UTC

Recent history (3.43 / 7)

confirms that the smartest guy who has the best interests of the country in mind is always the one who ends up in the White House, so you must be right.

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by: kanzeon @ Mon Mar 23, 2009 at 19:03:03 PM UTC

[ Parent ]

I don't even follow (3.50 / 8)

This plan is designed to avoid democracy.  They only have $100 billion in TARP money approved by Congress.  So they will go out get half a trillion dollars of FDIC money.  That money is supposed to be used to insurance small depositor's deposits; instead it is being used to insure investments that were never insured by the government.  There's no question that this plan is being designed to avoid approval by Congress.

As for the rest, I don't believe you think Barack Obama personally drew up this plan, so I can't take it seriously.

New Jersey politics at Blue Jersey.

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by: Hopeful in NJ @ Mon Mar 23, 2009 at 19:17:38 PM UTC

[ Parent ]

hey (2.67 / 3)

Could you tone down the disdain and malignation of motives without any evidence?  It is really plausible that Krugman, Sachs, Galbraith and Black (Atrios) came out against this as a ploy to drive traffic or readership?  

C'mon.  Do better and just refute their stated arguments rather than reading all sorts of nefarious motives into them.  

I would also note that in February 1965, a President who had been elected by 61% of the American people decided on a little operation called "Rolling Thunder" in a little place called Vietnam.  The "Cassandras" who questioned that decision were absolutely right.

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by: Daniel De Groot @ Mon Mar 23, 2009 at 23:53:45 PM UTC

[ Parent ]

troll rating abuse (0.00 / 0)

I already banned someone for this.  No one gave your comment a 0, they just explained why they didn't like it.  If you can't be bothered to type a reply, there won't be any point in having you comment here.

No more, please.

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by: Daniel De Groot @ Tue Mar 24, 2009 at 05:05:53 AM UTC

[ Parent ]

Too many variables to tell yet (4.00 / 1)

The strength of the Geithner/Obama approach has been to recognize the necesstiy of operating on many fronts. Economic recovery requires a sound banking system, which requires a solution to the toxic assets problem, which requires a stable housing market, which requires confident home buyers, which requires more and better jobs, which requires an effective stimulus, ad infinitum.

The administration got off to a very bad start on the stimulus, when they were under the delusion that Republicans could be helpful. Since then they've done much better. (Bernanke is pulling his weight as well.)

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by: rwm @ Mon Mar 23, 2009 at 20:01:45 PM UTC

the banking system is sound -- they're still operating under false delusions -- (4.00 / 1)

it's never been that too many toxic assets are hurting the system or economy -- or that a lack of credit has been hurting the real economy and preventing economic growth. The vast vast vast vast majority of banks are sound and don't have toxic assets.

it's always been that job loss and the loss of household wealth has resulted in a lack of consumer demand and spending -- which means businesses aren't begging for loans or credit anyway, and are making it worse by laying off workers, which keeps the vicious cycle going. Wall St. and a few giant banks/investment firms have been forcing businesses to lay off even more workers to appease them and share prices as well.

Americans aren't hurting because they can't get a loan for things. We're hurting because we don't have jobs and are not spending anymore.

Banks -- even the giant ones getting our trillions -- are sitting on tons of money because there isn't demand or opportunities to spend nowadays.

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by: amberglow @ Mon Mar 23, 2009 at 20:57:52 PM UTC

[ Parent ]

The issue (0.00 / 0)

on the table is how much are these assets worth.  From the beginning Geither has believed they are worth far more than the market is willing to pay.

If he is right, and he can create a market for these assets, then the banks will be able to dispose of the assets and their solvency will no longer be an issue since on an operation basis the big money center banks are making money hand over fist (as they usually do in a low interest environment).

Is he right?  The answer is a highly technical, and ideology doesn't provide much of a guidepost.

If he is, in 3 months no one will remember the aig bonus fiasco.  

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by: fladem @ Mon Mar 23, 2009 at 20:15:11 PM UTC

Trust and Transparency (4.00 / 1)

I think Chris's comments about the limits of knowledge - both layperson and expert - in this situation are right on target.  When you reach this kind of epistemological impasse, then thinking about trust is at least instructive.

The thing that I would add is that it is not just about who I trust, but the way the entire Obama (sigh) administration has conducted this business.  For months upon months people have been asking a few fundamental questions and they have simply ducked these questions over and over again.

1. Do you KNOW that the big banks are solvent?  What kind of data analysis is that knowledge based on?

2. Let's say we take macroeconomic scenarios A, B, and C.  What is your estimate under each scenario of how much the Geithner plan will cost the taxpayer?

This is one of the biggest public policy issues in generations and these are the TWO MOST IMPORTANT questions surrounding the issue.  These are questions to which the administration should have answers or (in the second case) best-possible projections.  In fact, I think they do have answers and best-possible projections, but they simply are unwilling to share them with the public.  Obama came into government putting more emphasis on transparency than (arguably) any president-elect ever.  And yet nobody in his administration will answer these questions.  Whether you support the plan or not, the lack of transparency regarding this issue is incredibly disappointing.

John McCain: Health insurance for low income children represents an "unfunded liability."

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by: FuzzyDunlop @ Mon Mar 23, 2009 at 20:36:29 PM UTC

yes fuzzy, youre on the right track. (0.00 / 0)

even more telling than what is done is how it is done.    
the process is disgusting, yes?

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by: M.B.S.S. @ Tue Mar 24, 2009 at 00:29:10 AM UTC

[ Parent ]

"If the plan works, voters will conclude that the banks and the private investors have got something for nothing. They will be right." (4.00 / 1)

BBC -- http://www.bbc.co.uk/blogs/the... -- The devil's not in the details --

Like nearly every finance minister in the developed world, the US treasury secretary would like US banks to offload their toxic assets at a price that both private investors and voters are happy to accept. It can't be done. Someone is going to end up sad - probably the voters. ...

If you start from the position that banks cannot be allowed to go bankrupt, and they cannot be nationalised, this may be as good a scheme as you are likely to get. The problem, as I said at the start, is not the detail but the basic idea.

Geithner has to offer such attractive terms to private investors because he knows that without such enticement, the gap between them and the banks will be too large.

After all, why would the banks want to accept a low price, when the administration has shown it will do almost anything to avoid taking the banks into public hands?

Clever though it is, that is the basic incentive problem which this scheme cannot design away.

If the plan works, voters will conclude that the banks and the private investors have got something for nothing. They will be right. That is unavoidable - indeed, desirable.

...

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by: amberglow @ Mon Mar 23, 2009 at 20:44:09 PM UTC

Karnack's third eye? BTW: Good catch on the Populist Caucus As New Progressives? Wed Feb 18, 2009 (0.00 / 0)

I don't think there is anything stopping them from ripping us off with taxpayer money the way they ripped us off with 401k money.
~Chris Bowers

Fundamentally the FRB assures that "they" will in perpetuity. And here's how:

• http://tinyurl.com/SOSmovement...

Who are "they" anyway? NAME NAMES!!!

1. http://tinyurl.com/WarGamesVig...
   
   
2. http://tinyurl.com/CapitalHome...

If you're ready to evolve and shift the paradigm, assimilate this:

• http://tinyurl.com/CESJorgHome...

Pay no attention to USA PATRIOT Act evildoers like:

1. http://tinyurl.com/InfandousGe...
   
   
2. http://tinyurl.com/ChasFreeman...

And definitely don't show up at:

• nysec.org/2009/03/25

The perfection of wisdom and the end of true philosophy is to proportion our wants to our possessions, our ambitions to our capacities, we will then be a happy and a virtuous people.
~Mark Twain

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by: epunum2009 @ Mon Mar 23, 2009 at 22:28:41 PM UTC