Why the need for this separate fund, once the banks are nationalised?
Public-Private Investment Fund: One aspect of a full arsenal approach is the need to provide greater means for financial institutions to cleanse their balance sheets of what are often referred to as "legacy" assets. Many proposals designed to achieve this are complicated both by their sole reliance on public purchasing and the difficulties in pricing assets. Working together in partnership with the FDIC and the Federal Reserve, the Treasury Department will initiate a Public-Private Investment Fund that takes a new approach.
whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected
While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive "stress test" will have access to a Treasury provided "capital buffer" to help absorb losses and serve as a bridge to receiving increased private capital.
I think the (scary) answer is that the US Treasury believes securitisation is a great idea and should continue
While the intricacies of secondary markets and securitization - the bundling together and selling of loans - may be complex, they account for almost half of the credit going to Main Street as well as Wall Street. When banks making loans for small businesses, commercial real estate or autos are able to bundle and sell those loans into a vibrant and liquid secondary market, it instantly recycles money back to financial institutions to make additional loans to other worthy borrowers. When those markets freeze up, the impact on lending for consumers and businesses - small and large - can be devastating. Unable to sell loans into secondary markets, lenders freeze up, leading those seeking credit like car loans to face exorbitant rates.
Banks create money when they make a loan. That's a privilege and that's why they are regulated.
But it's hard to see the compatibility of that with the <$1tn PPIF. Once the insolvent banks are taken under public control (involving capital injection, or following capital injection aka "buffer", I don't quite get), the government can choose what it wants to do with compromised assets, including keep them on the books.
In other words, what's the use of the PPIF, if backdoor nationalisation is indeed the aim?
So stabilizing the banks won't solve the credit squeeze. It will just stabilize the financial system. Which is no mean feat, but still only a partial solution to part of the problem. Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
Cleaning up banks will unclog several basic functions of the banking world which are very necessary and are still seriously constrained right now. In the long run, we're all dead. John Maynard Keynes
Or at least, to clean up the banking functions which they're supposed to perform - which may not be the same thing.
It is going to take a lot of time for this entity to get set up and find willing private partners and, together with them (or thanks to their superior market know-how), analyse the often very complex vehicles involved.
Meanwhile, an audit is going to estimate the banks' exposure to bad stuff. (How that is to be done convincingly without evaluating assets I don't see). There will then be an injection of a capital "buffer", and/or nationalisation (according to the Trojan Horse theory). This may well occur well before the PPIF has got far in its price-setting and allocation tasks. What use will it then be, what will be its role?
I think that if major American banks are nationalised, that will be because it becomes inevitable, not because this unclear, confused communication from Geithner masks a cunning plan to reach that goal without Wall Street seeing it coming.
But I'm not impressed by the very-cunning behind-the-scenes plan explanation. Once Obama's main project for dealing with an urgent financial crisis has failed, I don't quite see what extra leeway to introduce more radical policy he'll have gained.
We shall see.
What evidence is there that Obama works like that, or has ever worked like that?
Let the Chinese exchange (essentially) worthless pieces of paper (US IOUs) for the properties. The US declares that we put one over on them (Those stupid Chinese!) and the Chinese have a peaceful invasion of the US.
EVERYBODY WINS!!! (Throw confetti here) In the end, might makes right. Nothing has changed since the caveman.
So the banks will be stabilised with a convertible loan. Then the plan is that they'll try to sell off the toxic (um, "legacy" seems to be the new term) assets so the banks can lend again. They'll also try to get the asset-backed-security market going again to kick-start securitisation. What will happen if an when these attempts fail is anyone's guess.
I think it is necessary to stabilize the existing "bad" banks so that their spasms stop causing seizures in the broader economy.
Restarting the flow of credit is a different thing. Apart from the contradiction inherent in saying everyone is indebted beyond their means and immediately laying out a plan to start lending again, there is the fundamental problem that the securitisation mechanism involves selling loans to non-bank entities which are not required to have regulatory capital to cover the risk of default and so should possibly not be allowed to actually buy a loan. Hopefully Geithner doesn't intend for the stabilised banks to start creating SIV's and off-balance-sheet "conduits" again.
So, once the banks are stabilised I think there will still be a credit crisis in the "real economy". I am not quite sure how to deal with that. Also, after a debt binge there must be a monetary contraction unless the debt is inflated away. So it seems to me that a few months from now an expansion of unemployment benefits and of employment through public investment will still be necessary.
Somebody sitting on a large pile of cash could decide to set up a new private bank and start lending from it. There's not going to be much competition from the old banks, and apparently also not from direct government lending. Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
So we may switch one credit crunch for another... In the long run, we're all dead. John Maynard Keynes
