Geithner Backs The Elites
by dday
I'm hardly a Nobel-Prize winning economist, and so it disturbs me that even they are unclear just was Tim Geithner is trying to peddle with the new version of the banking industry bailout.
An old joke from my younger days: What do you get when you cross a Godfather with a deconstructionist? Someone who makes you an offer you can’t understand.
I found myself remembering that joke when trying to make sense of the Geithner financial rescue plan. It’s really not clear what the plan means; there’s an interpretation that makes it not too bad, but it’s not clear if that’s the right interpretation.
He's not the only one. Most are calling the plan vague and unclear, and the fact sheet doesn't help. There's a lot of use of Federal Reserve money to grease lending. There's this public-private partnership to buy the crap assets, which assumes that anyone would want to purchase them at all, even if seeded by Treasury funny money. And there's this "stress test" applied to banks to test their solvency, without any explanation of what happens if banks fail the test. Thus Geithner achieved the WORST of all possible worlds - a plan that looked close to a bailout of the banks and protection of the shareholders, without being clear enough for anyone to tell definitively. Thus, both public confidence and Wall Street confidence were not restored even a little, and the Dow responded accordingly.
Justin Fox' take is perhaps the best:
There are two cures for financial panic: dramatic action and the passage of time. Geithner seems to be of the opinion that, with the panic substantially abated since last fall but a lot of expensive problems remaining, the moment for dramatic action has passed. He reportedly fought off efforts by others in the Administration to come up with something more crowd-pleasing today. A long slog it is, then.
What we do know is that Geithner is a smooth inside operator, and he shot down practically every one of the more reasonable ideas coming out of the Administration, ideas they'll probably have to turn to after this money is potentially thrown away without an appreciable increase in lending. (UPDATE: Axelrod denies this, so it could be a Dems in disarray narrative) That Geithner is the chief policy adviser on this issue and people like David Axelrod are political figures can be spun as positive (no Rovian putting of politics above policy), except when you realize that all the policy advisers are moderate neoliberals pushing ideas that won't match the problem.
In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.
Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.
He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.
In other words, he prevailed over those who had the interests of people, and so the interests of executives on Wall Street will be in the foreground. Taxpayers will take all the downside risk and get none of the upside profits.
I agree that nobody knows what the banks are worth, and a "stress test" to see how they'll perform might be a good idea, but only if followed by wiping out those banks that have no chance of making it. But that's not what's happening. Geithner is keeping his friends whole while the rest of the nation starves. And there's not much rhyme or reason to it, either.
I am so disgusted with this entire proceeding that I am going to dispatch it quickly.
Let's start with the basics. The US banking system is insolvent. Got that? Insolvent. That does not mean every bank in the US is toast, in fact quite a few are probably just fine, and another large group is no doubt hurting and undercapitalized, but a couple of years of not shooting themselves in the foot again would enable therm (via earnings) to rebuild their equity bases sufficiently to proceed more or less as normal.
The history of major banking crises unambiguously shows that insolvent financial institutions need to be resolved. There are variations on the theme: the government can take them over and recapitalize them, clean them up and re-sell them, a la Sweden; you can wipe out equity investors and bondholders; you can try new twists, like various good bank proposals that have surfaced lately (making new entities out of the deposits and good assets and leaving the dreck with the existing bond and shareholders). While there would be many important details to be sorted out, this is not path breaking, except in the scale at which it needs to occur. And now, having had four actute phases of a credit crunch, the Fed and other central banks have plenty of liquidity facilites ready to deal with any initial overreaction. Rest assured, although radical measures would not be pleasant or easy, there are plenty of models and precedents.
But...here we have another scowling Treasury secretary, with a bit more hair than his predecessor, serving up the same fatally flawed approach as before: let's just throw money at the banks and hope they get better. This is tantamount to using antibiotics to treat gangrene. You waste good medicine and the progression of the rot threatens to kill the patient.
He won't break the backs of the elites, who still control this area of policy. And it's deliberately sketchy, with no numbers nailed down, so that they can respond to criticism with an answer like "we are still reviewing the options."
But there are no more options. The banks are insolvent and need to be nationalized, and probably will be, once we burn through hundreds of billions more because the Treasury Secretary is afraid of saying the word. When investment analysts are calling for a takeover, it's really not a wild or out-of-the-mainstream policy. The only thing standing in the way are elites.
Terrible, terrible, and at this point, not even the stimulus is going to make up for this massive loss of capital. We'll be back here talking about a new plan in six months.
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