April 01, 2009
What do I know about what really goes on in the backrooms of the Wall Street casino? Nothing, so I’m reduced to relying on Nobel Prize-winning economists like Paul Krugman, who says that Obama’s plan to clean up the mess won’t do anything but give our money to the card sharps who broke the bank in the first place.
And now here's Nobel Prize-winning economist Joseph E. Stiglitz saying the same darned thing. Goodness, what’s a poor boy to think?
Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).
What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.
Posted by Jerome Doolittle at April 01, 2009 11:43 AM
The quants want to get the computer restarted, which is what HAL (or whatever its name is now) wants. Maybe it's better to that we go back to a people based system instead of relying on mathematical modeling to determine how we structure (or restructure) our financial system.
But I don't don't really know. Mathematical modeling is way out of my realm too.
Krugman is probably right in theory. But his way also entails huge additional and immediate investments by taxpayers. After all, though the Krugman plan decimates bank balance sheets and wipes out the bondholders (something that doesn't bother me), the taxpayers will have to pony up massive additional money right now to recapitalize the banks. The other problem with Krugman's analysis is that he's assuming that the private interests in the plan will be happy to pay more than the underlying toxic assets are worth, given the cheap financing and downside protection. I've dealt with these hedge guys before, and if they think the the assets are worth $.40 on the dollar, they're going to bid less than that. It's certainly unlikely that they will pay more than $.40.
I listened to the various hearings last week and it appears that if the banks don't like the prices offered by the proposed auctions, the FDIC may in fact force them to participate if they haven't passed the stress tests. Krugman is worried that the banks will be overpaid. I don't think this is plausible. It's more likely that the banks will baulk at the prices being offered and then we can see if we have the political will to nationalize some of these banks.
I can't see Congress approving anything approaching the Krugman plan, especially after the AIG fiasco. The Congress didn't even give Obama the rainy day bank fund he wanted. Geithner is trying to get authority to close down these big institutions and I hope that he does it if the bailout program doesn't work.
After all, if Obama is willing to shaft the unions at the automakers, there's no reason to expect that he doesn't have the stomach to do it to Bank of America.
The plan is convoluted, but one thing seems clear to me-- the Obama folks really believe that it would more expensive (not to mention politically impossible right now) for taxpayers to execute a plan that Krugman and co. would like.
I'm praying that Obama's right on this one. We'll see.