From the four five and counting active quick hits on this, I think we need to have a thread on "the plan" from the Obama Administration to address the banking crisis leaked to the media last night. Here's a round up of reactions.
The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system - that what we're facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
If I'm right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory. The cost will be continued vast over-capacity in banking, and a consequent weakening of the remaining, smaller, better- managed banks who didn't participate in the garbage-loan frenzy.
But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets. Actually, that's not quite it: the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls "a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for [I don't think I can finish this on a Times blog]"
Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone's eyes to glaze over.
With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.
[...]The stalemate over banking has arisen because the economics team has been unwilling to take on the bank shareholders and management. It now reportedly plans to clean up the banks' assets through a new alliance of hedge funds and taxpayer dollars. That simply won't happen. The public won't tolerate such games for another round. The public won't accept more money going into financial bailouts until the banks are clearly being run for public benefit, not for the private gain of undeserving shareholders, management, and traders. America will not right itself until it regains a moral compass in economic affairs.
The closest I could find to a positive reaction from someone credible in economics is bonddad at DailyKos:
The central problem with this plan is the central problem with all plans dealing with the bad assets: will the banks be willing to sell and at what price? There is no guarantee anyone will be willing to sell or buy at a rate the market would like. I think this plan has an OK chance of working, but that is hardly a ringing endorsement.
Yep, that about covers everyone I know about whose opinions on economics I have any confidence in. Maybe Jerome a Paris or Ian Welsh will weigh in later.
My only comment to add is to note the stupidity of trying to get something like this out the door in the Friday news dump. Does the FND really work so well for huge policy announcements? I figure you can sneak by a second tier resignation or arcane regulation changes without enduring too much heat, but did they really think they could sneak Eat-The-Shitpile-Version 12.5 past the voters this way?
Anyway, discuss the plan, and please be civil. Remember, the Zero rating is not meant for "You are wrong."
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