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Obama's Emergency Banking Act of 2009

by Migeru Wed Feb 11th, 2009 at 04:14:45 AM EST

I guess I'll be a lone voice in the wilderness and defend US Treasury Secretary Geithner and his Financial Stability Plan. It's not all that bad.

First of all, let's look at what Geithner said introducing the plan on February 10th:

I am going to outline the key elements of this program today. But before I do that, I want to explain how we got here. The causes of the crisis are many and complex. They accumulated over time, and will take time to resolve.

Governments and central banks around the world pursued policies that, with the benefit of hindsight, caused a huge global boom in credit, pushing up housing prices and financial markets to levels that defied gravity.    

Investors and banks took risks they did not understand. Individuals, businesses, and governments borrowed beyond their means. The rewards that went to financial executives departed from any realistic appreciation of risk.

Haven't we been heaping praise on bloggers for saying these things for a few years? Shouldn't we be happy to hear it from the mouth of the US Treasury Secretary?

frontpaged by Jerome


There were systematic failures in the checks and balances in the system, by Boards of Directors, by credit rating agencies, and by government regulators. Our financial system operated with large gaps in meaningful oversight, and without sufficient constraints to limit risk. Even institutions that were overseen by our complicated, overlapping system of multiple regulators put themselves in a position of extreme vulnerability.
I mean, really...

At the bottom of that "spin sheet" from the US Treasury there's a link to a fact sheet (PDF). The first line is funny...

The Financial Stability Plan: Deploying our Full Arsenal to Attack the Credit Crisis on All Fronts.
reminiscent of the USA PATRIOT act: "Uniting and Strengthening America...". I guess the US government will always be the US government. Anyway...
To ensure that we are responding to this crisis as one government, Secretary Timothy  Geithner -- working in collaboration and joined by Federal Reserve Chairman Ben Bernanke, FDIC Chair Sheila Bair, Office of Thrift Supervision Director John Reich and Comptroller of the Currency John Dugan - is bringing the full force and full range of financial tools available to cleaning up lingering problems in our banking system, opening up credit and beginning the process of financial recovery.
Financial Stability Plan

1. Financial Stability Trust

  • A Comprehensive Stress Test for Major Banks
  • Increased Balance Sheet Transparency and Disclosure  
  • Capital Assistance Program

...
What on Earth is "a comprehensive stress test"? An Audit by another name. First of all, it's not optional. Banks will not be able to say that they don't want to take part in the exercise because they don't need help. Also, participating in the exercise cannot be interpreted as a sign of weakness in and of itself. This is one of the reasons a lot of earlier interventions have not worked: banks that took aid were punished by markets, creditors and rating agencies for showing weakness.
Requirement for $100 Billion-Plus Banks: All banking institutions with assets in excess of $100 billion will be required to participate in the coordinated supervisory review process and comprehensive stress test.
This "supervisory review process" is not a valuation of bad assets to find a "fair price": it is an estimation of risk exposures and of whether the banks have the necessary capital provision to face possible losses:
Forward Looking Assessment - Stress Test: A key component of the Capital Assistance Program is a forward looking comprehensive "stress test" that  requires an assessment of 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.  
Since the whole point is that the banks put these assets off their balance sheets to avoid capitalizing their exposures, they clearly cannot have enough capital and so they will, of necessity, be found insolvent or at least inadequately capitalised under current banking regulations. Anyway, just in case it needs repeating, this is not about finding a price for assets that have no market price: it is about exposures:
Coordinated, Accurate, and Realistic Assessment:  All relevant financial regulators --  the Federal Reserve, FDIC, OCC,  and OTS --  will work together in a coordinated way to bring more consistent, realistic and forward looking assessment of exposures on the balance sheet of financial institutions..
Assessing the exposures on the balance sheet is not, I repeat, finding a price for the assets on it. And, finally, transparency and accountability:
Increased Transparency and Disclosure: Increased transparency will facilitate a more effective use of market discipline in financial markets.  The Treasury Department will work with bank supervisors and the Securities and Exchange Commission and accounting standard setters in their efforts to improve public disclosure by banks.  This effort will include measures to improve the disclosure of the exposures on bank balance sheets.  In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.
It may not live to its potential, but potentially this is a 21st century version of Roosevelt's Emergency Banking Act:
On March 5, 1933, the day after Roosevelt's inauguration, he called a special session of Congress which instituted a mandatory four-day bank holiday. This act provided for the reopening of banks after federal inspectors had declared them to be financially secure.

...

Within 300 days of the act's passage, 5,000 banks had passed inspection and were reopened. Roughly two-thirds of U.S. banks quickly reopened under this act, and faith in banking institutions was somewhat restored.

This act was a temporary solution to a major problem. The 1933 Banking Act passed later that year presented elements of a more permanent solution, including formation of the Federal Deposit Insurance Corporation (FDIC).

Anyway, back to Geithner. Just like this is a Mandatory Audit under the name of Stress Testing, it is quite likely a Nationalisation by another name:
Capital Assistance Program: 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. While most banks have strong capital positions, the Financial Stability Trust will provide a capital buffer that will: Operate as a form of "contingent equity" to ensure firms the capital strength to preserve or increase lending in a worse than expected economic downturn.   Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution's stock price as of February 9, 2009. Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review.
Banks that are found to be lacking in regulatory capital (most likely, all banks :-) will be "encouraged" to seek private capital but they are not likely to find it. Then, they'll get capital from the Treasury in the form of "convertible preferred equity", that is, a sort of bond with a divident rate to be set by the Treasury itself, and convertible into common stock at a price based on the February 9 market price and thus unaffected by the sell-off triggered by today's announcement (isn't that brilliant?).

I think the only flaw in this scheme is that for small banks, the audit is not mandatory but optional. I think it should be extended to them in successive waves, but also in a mandatory way.

Display:


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Tue Feb 10th, 2009 at 06:43:02 PM EST
I guess I'll be a lone voice in the wilderness and defend US Treasury Secretary Geithner and his Financial Stability Plan.

Now hang on.  For better or worse, I defended Geithner when he was nominated because (1) Brad DeLong vouched for him and (2) I've never heard the man utter a word and thus he's never had a chance to annoy the shit out of me.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Feb 10th, 2009 at 07:04:53 PM EST
[ Parent ]
But aside from that, an excellent job, Mig, as always. :D

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Feb 10th, 2009 at 07:20:38 PM EST
[ Parent ]
Even those of us who recognize that it is stupid are susceptible to these endless series of panics that mark the "left" and benefit from some calm analysis.
by rootless2 on Wed Feb 11th, 2009 at 09:31:06 AM EST
[ Parent ]
I think we're too use to being had, to the point that we scream 'fraud!' as soon as some policy is announced.

As you can see from the comment thread it is still unclear how this is supposed to work in detail, and what the goal of the legislation actually is. But I'm personally on Krugman's "wait and see" camp.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 09:35:15 AM EST
[ Parent ]
We're going to have to wait and see anyway. And the likelihood is that the banks will have to go bust or be nationalised at some point.

I hope we're not going to have an argument then, along the lines "that's what Geithner meant to happen"/"no it isn't!" ;)

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 11th, 2009 at 09:42:19 AM EST
[ Parent ]
When I saw how bitterly Republicans were attacking it. Often they seem to see more clearly than we do what are the important components of a plan.

When Larry Kudlow says that a bank plan is terrible, my instinct is to wonder what brilliant part of it I had not previously noticed.

by rootless2 on Wed Feb 11th, 2009 at 09:51:42 AM EST
[ Parent ]
I am on the record predicting most banks in the OECD will be nationalised by year's end. We'll see.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 09:53:05 AM EST
[ Parent ]
I think the banks might be "stabilised" and not go bust, but also be unable to lend any more because of the weight of the toxic waste in their balance sheets. We'd go from zombie "dead banks walking" to comatose "live banks not walking". Apart from not lending they would probably be generating very little profit.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 09:56:24 AM EST
[ Parent ]
the Japanese solution - ironic, given how extensively the US pundit class has berated the Japanese for not "doing the right thing" and for showing what one was supposed not to do...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 11th, 2009 at 10:06:04 AM EST
[ Parent ]
Ironic, also, that Bernanke made his name professionally writing about how to avoid "the Japanese solution" and spent a year dropping cash from helicopters trying to implement his theory, and here we are.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 10:21:04 AM EST
[ Parent ]
FT.com: Roubini: Anglo-Saxon model has failed (9 February 2009)
He also criticised the US and UK approach to bank bail-outs, comparing it with attempts by Japan in the 1990s to solve its banking crisis. "The current US and UK approach may end up looking like the zombie banks of Japan that were never properly restructured and ended up perpetuating the credit crunch and credit freeze," he said.


Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Feb 13th, 2009 at 06:48:39 AM EST
[ Parent ]
... understanding all its traditions. I especially like this clear explanation of the new plan.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Feb 11th, 2009 at 02:21:11 PM EST
[ Parent ]
Geithner might not give them up, but that might be his successor's first assignment.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 11th, 2009 at 11:29:27 PM EST
[ Parent ]
... Geithner proposal is who the "them" is ... if the banks turn out to be unable to service their debt and senior preferred shares, then the recourse is to convert senior preferred shares to common shares to dilute the equity of the shareholders.

The solution to not having enough money to pull toxic assets out of the system to get enough of the toxic assets out of the hands of all of the big money center banks to ensure that they can continue to act as big money center banks ... rather than the alternate view of the task at hand, in the terms of ensuring a sufficient subsystem of non-zombie banks to be able to provide the finance sector services required by Main Street if there is a recovery in 2010 or 2011 ... is to subsidize the acquisition of toxic assets by speculators.

The "them" he is not giving up is the senior management and overpaid specialists for the big money center banks. And, seemingly, he continues to view a main function of the banking system to act as a middleman between financial individuals and financial markets, with hundreds of billions of dollars under his direct control to be aimed at socializing losses so that the process can continue.

IOW, the people that have to be the main target of any hidden nationalization of the banking system aimed at ensuring that what was once its primary function (but which it "outgrew" over the past thirty years in the "market centric" Anglo disease countries) is not sacrificed to acting as a middleman between wealthy individuals and financial markets.

However, bank shareholders ... many of them, indirectly, small individuals and small business via the pension funds, insurance companies and other institutional investors providing "Main Street" financial services ... well, if it goes pear shaped, they can take a haircut. You gotta have your priorities, after all.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Feb 12th, 2009 at 07:10:21 AM EST
[ Parent ]
Geithner's ultimate goal seems to be to restart the loan securitisation engine... I don't think that can happen, and I hope if it could happen it will be stopped by the likes of Rep Capuano (D - Mass).

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Thu Feb 12th, 2009 at 08:10:01 AM EST
[ Parent ]
... the basic depository institution function is a "money engine" ... acting as a depository institution whose liabilities function as money allows the depository institution to create new liabilities to finance new lending (with fiat currency reserve requirements acting as a governor on the process).

The financial middleman function, on the other hand, is not an engine, but just a transmission.

But if you the textbooks for Money and Banking ... even the so-called "New Keynesian" textbooks ... the role of the Finance Sector is the middleman function, and even though there are chapters that describe the money creating function of depository instituutions in some detail, the fact that this is not a financial middleman function and so the depository institutions are more than simply middlemen ...

... well, that is not in there.

And we have raised more than a generation of college students going into the finance sector on this blinkered monetarist view of the finance sector, that money is somehow dropped on the economy by heicopters and banks are supposed to be just one more type of financial middleman.

It could well be that Geitner in reality simply does not know that he is working on fixing the oversized monetary transmission when the problem is that the monetary engine is not only broken, but is a too small engine trying to drive a too large transmission to make an effective drive train.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Feb 13th, 2009 at 07:03:34 AM EST
[ Parent ]
Gah!
And we have raised more than a generation of college students going into the finance sector on this blinkered monetarist view of the finance sector, that money is somehow dropped on the economy by heicopters and banks are supposed to be just one more type of financial middleman.
The structural problem seems to be that just about anyone with some schooling in economics in the last 30 years (and that would mean just about anyone under 50 with some schooling in economics) has a blinkered monetarist view of the economy (let alone of the finance sector). And what makes this even worse is the masses of people who have just had a one-time "introduction to economics" course or have read some "economics explains everything" paperback from some airport newsstand. Because it makes it harder for heterodox economists like yourself to get your point across as you don't only have to explain things but you have to get people to unlearn what they think they know.

In other words, even if a group of heterodox economists led a revolution, the slightly educated masses wouldn't follow.

A little learning is a dangerous thing.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Feb 13th, 2009 at 07:18:31 AM EST
[ Parent ]
... that make the wrecklist at Agent Orange, and never any Econ diaries. "Saving" as adding to a Dragon's Hoard that will increase societies real productive capacity when "the time comes to spend it" ... that is even more deeply entrenched than the "gas tax is political suicide" meme.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Fri Feb 13th, 2009 at 12:06:14 PM EST
[ Parent ]
"Saving" as adding to a Dragon's Hoard that will increase societies real productive capacity when "the time comes to spend it" ... that is even more deeply entrenched than the "gas tax is political suicide" meme.
I'll dig up Keynes' rather short demolition of that in The General Theory...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Feb 13th, 2009 at 12:12:37 PM EST
[ Parent ]
... demolished, readers have to be in a mood to permit concepts to be demolished in order to avoid the, "well, there's a plausible sounding bit of bullshit" reaction.

And of course, Agent Orange is designed to avoid undermining people's basic prejudices.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Feb 13th, 2009 at 12:55:21 PM EST
[ Parent ]
... with a diary about how stupid John Boehner (R-OH) is to be complaining about the $8b for HSR, claiming it was a pet project for Harry Reid to get a bullet train from Las Vegas to Hollywood, when the money is for designated HSR corridor, of which there are TWO here in Boehner's home state of Ohio and NONE in Nevada.

You're From Ohio, You Idiot, Don't Screw With Our Train

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Feb 14th, 2009 at 09:50:43 PM EST
[ Parent ]
File this under vague suspicions clarified and confirmed.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 12th, 2009 at 02:34:47 PM EST
[ Parent ]
D: ... Hey, asshole, he can't help you. I know what you are, and I know what you're not. I'm the best friend you have on the face of the earth, and I'm going to help you understand something, you punk. You are no fucking cop.

Diversity is the key to economic and political evolution.
by Cat on Tue Feb 10th, 2009 at 07:15:38 PM EST
You can suggest that the Recovery and Reinvestment Act of 2009 and subsequent rulemaking abrogated to US Treasury are political equivalents to passage of the Emergency Banking Act of 1933, but that would be a lie. Neither the Act of 2009 nor the rulemaking authorized by the omninbus EESA of 2008 approach FDR's opportunistic and administrative initiative in 1933. For one, the Emergency Banking Act was one of 15 bills enacted during FDR's First 100 Days, the interregnum of epic failure. And the proclamation was entirely pro forma. More important, Obama's administration has not declared a "bank holiday," and it never will, because Obama's advisors do not admit failure ("I won"), and they will never permit core bank divestiture not matter the state of "top ten producers' " insolvency. TBTF is not an interboobz theory. Core bank protection is actually, to PWG directors, the prerequisite of "nationalizing" financial capitalism -- combining operations and monetizing domestic debt.

In mid-February 1933, banking difficulties developed in Detroit, Michigan.  The RFC was willing to make a loan to the troubled bank, the Union Guardian Trust, to avoid a crisis.  The bank was one of Henry Ford's banks, and Ford had deposits of $7 million in this particular bank.  Michigan Senator James Couzens demanded that Henry Ford subordinate his deposits in the troubled bank as a condition of the loan.  If Ford agreed, he would risk losing all of his deposits before any other depositor lost a penny.  Ford and Couzens had once been partners in the automotive business, but had become bitter rivals.  Ford refused to agree to Couzens' demand, even though failure to save the bank might start a panic in Detroit.  When the negotiations failed, the governor of Michigan declared a statewide bank holiday.  In spite of the RFC's willingness to assist the Union Guardian Trust, the crisis could not be averted.

The crisis in Michigan resulted in a spread of panic, first to adjacent states, but ultimately throughout the nation.  By the day of Roosevelt's inauguration, March 4, all states had declared bank holidays or had restricted the withdrawal of bank deposits for cash.  As one of his first acts as president, on March 5 President Roosevelt announced to the nation that he was declaring a nationwide bank holiday.  Almost all financial institutions in the nation were closed for business during the following week.  The RFC lending program failed to prevent the worst financial crisis in American history.

Chicago banking panic, June 1932

James (1938) argues that the panic was triggered by several factors, including declines in real estate values, falling local utility stocks, and a well-publicized local case of bank fraud and mismanagement. In addition to these problems, the Chicago municipal government had been undergoing significant strain since 1931. The government failed to make payments on its municipal bonds in January 1932, and beginning in 1931 intermittently withheld pay from government workers or issued scrip. In March 1932, payments to city workers were suspended indefinitely. The city government's revenue problem weakened the banks by limiting bank revenue from municipal bond coupons, and encouraging withdrawals by illiquid depositors.... James argues that interbank cooperation, and the intervention of informed third-parties, brought an end to the crisis, but his account of the crisis leaves unresolved whether the banks that failed during the panic were those most likely to be insolvent, or whether failing banks simply lacked the protection of the clearing house or correspondent banks for other reasons. In the following sections we address that question. ..

In the case of the book net worth ratio, the sign was positive (contrary to our expectation). This is consistent with results from earlier work on similar data by White (1984, 126). In Tables 1b and 1c, we restrict our sample to banks for which we have stock price information, and add to our list of regressors the ratio of the market value of net worth to the market value of assets (assuming par valuation for debt). We also redefine the earnings to net worth ratio using the market rather than the book value of net worth. The market equity to asset ratio has the predicted negative sign and is statistically significant....

We conclude that failures during the panic reflected relative weakness in the face of a common asset value shock rather than contagion. That does not mean contagion was absent, nor does it mean that the run on Chicago banks is a myth. Rather, we think it means that - consistent with James (1938) account of the management of the banking crisis - cooperative intervention by the Chicago clearing house prevented the failure of banks that were known to be solvent until the runs by uninformed depositors subsided. Absent such cooperation, the failure experience during the panic of June 1932 could have been very different. [viz. +$550B redemptions, aborted, "electronically"]  As in many other examples of banking panics prior to the Depression (Calomiris and Gorton, 1991, Calomiris and Schweikart, 1991, Calomiris, 1993), bank failures in Chicago in June 1932 were not a costly consequence of panic-induced contagion or confusion on the part of depositors about the riskiness of banks. Indeed, it may have been that identifying and closing insolvent banks helped to resolve the depositor information problems that had threatened solvent banks with runs during the panic. [emphasis added]

Politics was also a factor in the handling of the assets of the closedUnion  [Guardian]  Trust, then a big prize as the largest bank in the city of Cleveland. Corporate lawyer A. V. CANNON†, one of the few Democrats on Union Trust's board, was instrumental in the city's obtaining funds for 175,000 unemployed in the Depression. He assumed the additional role, in the spring of 1933, of working to protect the saving deposits of thousands of Clevelanders with money in the two closed big banks, Guardian and Union Trusts. In April 1933 he went on radio station WTAM, at the top of the Union Trust building, to announce to the city that he would be chairman of a new national bank, to be created with assets from the two permanently closed banks. In the end, instead of creating a new bank, Cannon brought the large trusts from Union over to National City, until then a relatively small bank.

While 1933 was the worst year in banking history in the nation and in Cleveland, it was a banner year for little National City [core bank, 2008], which tripled its assets, obtained the RFC regulator of the closed Guardian Trust as its new president (Sidney Congdon), and the former head of the Fourth Federal Reserve Bank (L. B. Williams) as its new chairman. To do this, National City reorganized its board so that half were trustees from the old Union Trust, including Cannon and GEORGE HUMPHREY† of Hanna Mining. (Cannon died unexpectedly a year later and the PLAIN DEALER ran a headline across the top of the front page because his death was considered important local news.)

During the winter of 1932-1933, banking conditions deteriorated rapidly. In retrospect, it is not possible to point to any single factor that precipitated the calamitous events of this period. The general uncertainty with respect to monetary and banking conditions undoubtedly played the major role, although there were specific events that tended to increase liquidity pressures within the system. Banks, especially in states that had declared bank moratoria, accelerated withdrawals from correspondents in an attempt to strengthen their position. Currency holdings increased significantly, partially in anticipation of additional bank moratoria.

Additional liquidity pressures were brought about by concern relating to the future of the dollar. With the election of Franklin D. Roosevelt in November 1932, rumors circulated that the new administration would devalue, which led to an increase in speculative holdings of foreign currencies, gold and gold certificates. Unlike the period of international monetary instability in 1931, a significant amount of the conversions from Federal Reserve Notes and deposits to gold came from domestic sources. These demands placed considerable strain on New York City banks and, ultimately, on the Federal Reserve Bank of New York.

It was the suddenness of the withdrawal demands in selected parts of the country that started a panic of massive proportions. State after state declared bank holidays. The banking panic reached a peak during the first three days of March 1933.  ...

As one of his first official acts, President Roosevelt proclaimed a nationwide bank holiday to commence on March 6 and last four days. Administration officials quickly began to draft legislation designed to legalize the holiday and resolve the banking crisis. Early in their deliberations they realized that the success of any proposed plan of action primarily would hinge on favorable public reaction. As noted by Raymond Moley, a key presidential adviser who attended many of the planning sessions:

We knew how much of banking depended upon make-believe or, stated more conservatively, the vital part that public confidence had in assuring solvency.4

To secure public support, officials formulated a plan that relied on orthodox banking procedures.[emphasis added]

Schlesinger

The tenets of the First New Deal were that the technological revolution had rendered bigness inevitable; that competition could no longer be relied on to protect social interests; that large units were and opportunity to be seized rather than a danger to be fought; and that the formula for stabilit in the new society must be combination and ooperation under larger federal authority. This meant the creation of new institutions, public and private, to do what competition had once done (or was supposed to have done) in the way of balancing the economy --institutions which might well alter the existing pattern of individual economic diceision, especially on investment, production, and price. ...

The United States was not unique, of course, in this self-absorption. Everywhere governments were building economic walls to seal off their lands from the global decline and to protec their national recovery programs from the export of other nations' depression. In looking homeward, the United States was sharing --as it had been for some years-- in a world-wide movement toward economic nationalism.

Yet nationalism could take diverse forms; and the nationalism of the First New Deal was different from that of the preceding Republican administration. The nationalism of Herbert Hoover aimed to protect the domestic industrial and agricultural structure by raising the tariff. At the same time, however, it clung to the international gold standard. The nationalism of AAA [Agricultural Adjustment Act, May '33] and NRA [National (Industrial) Recovery Act, June '33], on the other hand, aimed to free the national economy from international monetary institutions which prevented domestic planning; at the same time, it saw little point in increasing tariff barriers. Tte conservative version of economic nationalism was thus nationalist in trade, internationalist in finance; the liberal version, internationalist in trade, nationalist in finance. [1958: 179-185]

The "Blueprint for Modernization,"  of course, resolves a neo-liberal, totalitarian agenda to guarantee income by nationalizing financial products to conform to US Basel Accord (BCBS) accounting standards of international trade. We all will be in this together.

Diversity is the key to economic and political evolution.

by Cat on Tue Feb 10th, 2009 at 10:19:20 PM EST
[ Parent ]
Once again - nationalisation isn't about cash, it's about policy, and specifically it's about defining which political class benefits.

There's nothing here - nothing at all - which suggests that even if the banks are nationalised, a change in policy is likely.

There may be some token pressure on bonus culture and on salaries, and perhaps also on dividends. But it's in no way what it needs to be, which is a giant fun-sized nvestment in the real economy.

Handing cash to banks doesn't mean that businesses will be capitalised, or that a thousand start-ups will bloom - not unless there's specific and forceful guidance to that end.

Geithner has made it clear that he doesn't believe in that kind of government guidance. So this is a kind of Keynesianism for bankers only, and not for the rest of the economy.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Feb 10th, 2009 at 07:35:58 PM EST
There's nothing here - nothing at all - which suggests that even if the banks are nationalised, a change in policy is likely.
The fact is the Governments (all of them) desperately want to avoid having to tell banks what to do with their money. You quoted Geithner to that effect last night:
"I do not believe we can put ourselves in position of raising the prospect where government comes in and directly manages at great detail the choices [companies] make," Geithner said. "Ultimately, we will end up costing the economy and taxpayers much more."

Geithner said that he is "deeply offended" by "many of the judgments" top executives have made, clearly referring to big bonuses and other perks. "But the important offsetting obligation we have is to not create the prospect that the government is going to come in and make decisions for institutions that want to remain in private hands," he said.

This is, unfortunately, the political class we have: they truly believe that the private managers that brought us the crisis will do better at getting us out of it than anyone the government can appoint.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 05:47:14 AM EST
[ Parent ]
I think in fact they believe that finance IS the economy. Everything else is a kind of semi-visible froth which occasionally appears on balance sheets - with positive numbers when the froth is behaving itself, and negative numbers when it isn't.

What exactly does Wall St banking contribute to the real economy, except bubbles and debt?

You can hide, nuke, bury, transform or lie about toxic assets all you want, but Wall St doesn't create any real wealth itself. All it does is impose a kind of top-down seignorage, demanding that all national and international business strategy should be run for its own immediate financial benefit.

Wall St could do some good by offering high quality social investment to implement government strategy. But to an ideologue like Geithner that seems to be literally unthinkable.

So the irony is that while Geithner doesn't believe that governments should tell private business what to do, banks and finance don't share the same reticence when it comes to influence.

And so far it seems that Geithner's is more about protecting that model of influence at almost any price than challenging it.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Feb 11th, 2009 at 08:24:00 AM EST
[ Parent ]
... its just that their role is a transmission role, and hacking away at productive capacity and diverting depository institutions from their primary responsibilities of money creation toward becoming an extra layer of middlemen for the capital markets ... its like swapping to a smaller engine to make room for a "more powerful transmission". Its an internally contradictory process.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Fri Feb 13th, 2009 at 12:10:04 PM EST
[ Parent ]
My problem with Geitner as Sec. of Treasury is that this is just a continuation of the most maddening aspect of the whole Obama campaign--He implies that his administration will do what is needed, but never comes out and says so.  Once again, time will tell.

The most heartening response to his speech was the reaction on Wall Street--Dive! Dive! Dive!  Perhaps the reason they were concerned about the lack of specifics was that they fear that he will pull back the curtains and reveal them in all of their nakedness.  They all know what will happen to the biggest banks in this eventuality.  The plunge was probably exactly because they just realized that the response was not going to be: "Here is some more money for your regrettable situation.  We are certain you will do the right thing."

I have yet to see a "public-private partnership" that was not a euphemism for putting public money into private pockets.  But what may save the taxpayers further donations to financial criminals is that the process requires private sector money, and these guys know too much to offer any.  This would then lead to effectively to nationalization--which is where many of them belong for the time being.  Then Obama can present effective nationalization as a last resort that he did everything possible to avoid.

The other shoes to drop will be how they deal with credit default swaps and other derivatives and how they deal with all of the shady deals involving off balance sheet SIVs, conduits, etc.  I would hope that these are, effectively, to be treated as fraudulent transactions, following logic laid out in a recent thread by Jake.

But again we must wait and see.  Wait too long and it may well be too late.  But what has happened to date  could be an astute way to be forced into doing what needs to be done while being seen as having tried all alternatives to avoid so doing.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Feb 10th, 2009 at 07:59:14 PM EST
ARGeezer:
is that the process requires private sector money, and these guys know too much to offer any

Right on the button ARG...

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Feb 10th, 2009 at 08:41:48 PM EST
[ Parent ]
by Sven Triloqvist on Wed Feb 11th, 2009 at 03:27:20 AM EST
[ Parent ]
Why do you think Obama doesn't say outright what he's going to do? What is he afraid of? The contrast with the Bush administration is stark: they used to say exactly what they would do and nobody believed they would dare or they really meant what they were literally saying, and then they went and did it...
But what has happened to date  could be an astute way to be forced into doing what needs to be done while being seen as having tried all alternatives to avoid so doing.
We have to wonder why this is necessary...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 05:37:45 AM EST
[ Parent ]
Because nationalisation > socialism <> work of Satan.

Given the extremely hostile media landscape and the populace steeped in right-wing bullshit  he has to work with I'm not sure that this isn't a necessary sleight-of-hand.

by Colman (colman at eurotrib.com) on Wed Feb 11th, 2009 at 05:58:24 AM EST
[ Parent ]
Not to mention the political class he has to deal with and his own education as an American.
by Colman (colman at eurotrib.com) on Wed Feb 11th, 2009 at 05:59:07 AM EST
[ Parent ]
Plus Obama knows bugger-all about economics and finance.

So he is dependent on his advisers and appointees.

 

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Feb 11th, 2009 at 08:02:48 PM EST
[ Parent ]
ATinNM:
Plus Obama knows bugger-all about economics and finance.

That is actually a plus.

Because everything his advisers know is based upon a specific - demonstrably useless - legal paradigm.

I am sure he is bright enough to recognise a solution when he sees one, particularly if - as I believe - this solution involves legal innovation.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Feb 12th, 2009 at 08:44:16 AM EST
[ Parent ]
Chris, he'd need to know something about economics and finance, like you do, to be able to realise that
everything his advisers know is based upon a specific - demonstrably useless - [legal] paradigm
(see also my signature - it's a plus for James Galbraith that he knows about economics and finance).

Because he knows bugger all about economics and finance he lacks the self-confidence to tell his advisors to bugger off.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Thu Feb 12th, 2009 at 08:48:42 AM EST
[ Parent ]
Even IF Obama is trying to move the country to a solution that ET would find acceptable as fast as he can, (which I doubt,) he has to avoid moving so fast that he is vulnerable to being defined by his opponents as some black radical out to subjugate the existing social structure.  I suspect that his chief aim is to find some way to turn things around with the fewest possible number of changes that could be seen as radical.  Any radical solution he endorses has to be seen as something that he was forced to embrace.

Obama does have a good mind and temperament.  Given the state of popular belief in the USA, it is hard to see who could have been elected who would have a better opportunity.  Sanity has very few supporters today in the USA.  Obama has the opportunity to shift the popular views of these matters.  He needs to start driving important points home with rhetorical sledge hammers rather than dropping coy hints that he really does understand the problem.  It is hard to see how having more Republican influence in Congress in 2010 and/or having a Republican president in 2012 would help.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 11th, 2009 at 02:05:05 PM EST
[ Parent ]
he has to avoid moving so fast that he is vulnerable to being defined by his opponents as some black radical out to subjugate the existing social structure.

I say this wholly unrelated to the rest of the discussion: Not gonna happen.  How do you go about portraying Obama as a black radical now if it failed miserably during the campaign, when people didn't know a lot about him?  And how do you do that now when he's sitting on a +40 net approval in the face of a -30 net disapproval for the Republicans?

That ship has sailed.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Feb 11th, 2009 at 02:36:19 PM EST
[ Parent ]
He's the blackchurian candidate!

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 02:48:56 PM EST
[ Parent ]
I again lost power just when I was starting to respond to this comment.

Obama got a pass during the campaign because there really was no basis for calling him a "black radical."  Best they could do was to attempt to smear him with guilt by association with his preacher, whose great "sin" was to see and diagnose the class and race biases, structures and institutions in our society.  Obama himself had been very careful to avoid ever doing anything that could be used to label him a radical.  In fact he is not a radical.  He represents the essence of the establishment view of what the USA should be--wonderful opportunity that does not challenge that very establishment.

But, if he is seen to do by choice things that attack that establishment, that will change in a New York minute.  I am reminded of the Mexican proverbial saying: "Mata un pero y siempre se llama 'matapero'!" (Kill one dog and forever be called a dog-killer!)  That is why it is important that he be seen to be forced into nationalization of banks, etc.

That said, I do not think he is at all eager to do anything that undercuts the financial establishment.  I can only hope that he understands quickly enough that there is no substitute for directly confronting the core problems of the financial situation: insolvency and the criminality that led to it.  I prefer that hope to councils of despair.  If he fails to rise to that challenge, and soon, then we all are in for a very tough decade or two.  It might prove a blessing to have Geithner laughed off the stage early on.  It could be the kind of slap in the face Obama needs to force him to confront the true depth of the problem.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 11th, 2009 at 08:13:31 PM EST
[ Parent ]
i'm hoping he's playing the pugs by letting them some slack, allowing the fish to run with the line, before reeling it in once it's out of energy, and meanwhile has become such a parody that it convinces no-one left of limbaugh.

someone on booman said while he doesn't know it yet, geithner was just picked for O to throw under the bus when the rest of the economy tanks...

and then?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Feb 11th, 2009 at 03:01:45 PM EST
[ Parent ]
That would be another 'Obama - he's actually a total supergenius' kind of a view.

I'm not seeing any real evidence for that, and some evidence - like the Gregg pick, and the unfounded supergenius rumours that this would give the Dems 60 - that there's not so much of the supergenius happening.

At the moment we don't really have enough data to tell - and what there is doesn't suggest supergenius, more a deliberate and rather fluffy policy of 'Why can't we all get along'?

I wouldn't be unhappy if Obama turns out to be a strategic trapmeister - but I would be surprised.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Feb 11th, 2009 at 06:15:28 PM EST
[ Parent ]
I agree that the Obama As Supergenius view doesn't make a lot of sense.

There's some logic to Judd Gregg without believing the Supergenius idea.  The Republican who's replacing him is, as I understand it, a fair bit more moderate.  And the other thing is, it gives Gregg a chance to bow out gracefully if he, as I suspect he might have been, on the fence about reelection, while also giving the Dem candidate in 2010 a clear path in a blue state.

And, given that Rahmbo is monitoring the Census, Gregg can't do any real damage, even though that was never really a danger to begin with (contrary to the ranting and hyperventilating of the blogosphere, the ComSec has very, very little influence on Census).

But the rest I agree with.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Feb 11th, 2009 at 07:28:25 PM EST
[ Parent ]
... fell apart, Gregg lobbied for the position and promised when interviewing for the position that he would be on board for the basic direction of Obama's policy.

But, it turns out, no, when he was saying that, he was still in interview for position mode ... he didn't really mean it.

Probably he's been a Senator for long enough that the idea that he would promise something in one week and be expected to stick to it the next week was an entirely foreign notion.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Feb 13th, 2009 at 12:13:30 PM EST
[ Parent ]
The Krug-Man seems to say what I had in mind, but says it better than I can this morning:

Op-Ed Columnist - Paul Krugman Blog - NYTimes.com

The plan deserves praise for what isn't in it, at least as far as I can tell. There doesn't seem to be provision for mass purchases of toxic waste at premium prices; there also doesn't seem to be a massive "ring-fencing" guarantee against private losses on bad assets. In that sense the plan is better than what the last few weeks of leaks led us to expect.

What is in it, in reverse order:

...

3. Stress test: everything depends on how this is actually implemented. What happens if, or more likely when, a major money center bank is stress-tested and found to have negative net worth? One possibility is that the auditors are told to come up with a different answer; that's a big concern. The other is that the bank is effectively nationalized; as I read the language that could be achieved as part of the public capital injection.

So what is the plan? I really don't know, at least based on what we've seen today. But maybe, maybe, it's a Trojan horse that smuggles the right policy into place.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Feb 11th, 2009 at 05:02:59 AM EST
Metatone:
But maybe, maybe, it's a Trojan horse that smuggles the right policy into place.

Nationalisation by stealth?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Feb 11th, 2009 at 05:08:27 AM EST
[ Parent ]
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 11th, 2009 at 05:20:32 AM EST
[ Parent ]
I posted MLECTARPPPIF, Same Story on the basis of the preview Treasury had put out to the media, you're looking at the full statement and, like Krugman with his Rorschach, seeing the butterfly you can make out if you squint ;)

I have already made brief objections to your view. The two points that seem important to me are, first, the MLEC aspect of the announced Public-Private Investment Fund. This is not the "stress test" or "audit": but it does purport to be about setting a price on the toxic assets. The private sector, Geithner says, will be better at setting that price than governemnt would be. (In passing, that reminds me that Hank Paulson brought private-sector boys into his evaluation team, presumably following the same logic, and the result was fail).

The obvious problem here is that private capital has no interest in buying these assets at a price that would save the banks, and Geithner's plan to "leverage" private capital with public opens him right up to the suspicion he spoke
 about to David Brooks
:

"I was very worried about us looking like we're vulnerable to the charge that we're overpaying as a way to provide disguised subsidies to banks."

Perhaps more exactly, that private interests would buy the assets at their own evaluation, and the taxpayer would provide the difference needed to keep the banks afloat.

Roubini's RGE Monitor 10 February newsletter (e-mail, so no link) says this:

The aim is to involve private capital on a large scale that sits currently on the sidelines while also allowing private market forces to determine the price for currently troubled and illiquid assets.

A similar experiment was tried before with the private sector sponsored M-LEC vehicle that ultimately proved unviable due to asymmetric toxic asset exposures of participating banks and due to still unresolved asset valuation issues. Commentators agree that for a similar plan to work this time, the government will have to assume a potentially substantial downside in order to induce otherwise unwilling investors to participate in view of the size of potential losses.

Jérôme now says this public-private toxic buy-out might be a fair proposition:

as long as public and private investors take the same risk pari passu

In circumstances where defaults are rising and banks' assets are deteriorating, getting private investors to participate with genuine good will in this exercise seems likely to be extremely difficult. And even were Geithner to obtain that good will, the onus is still on the government to make up the shortfall between what the private sector will pay and what the banks need to make their balance sheets whole.

The second point centres on the "stress test". Of course, there's nothing wrong with an audit (estimating "exposure" rather than price, as you insist, though what the metrics of exposure are remains unclear, and I'd point out that the FFIP part of the plan does in fact call for setting a price for the bad assets). The point is that (if it's not fudged) it will show the true state of the US banking system (and, by inference, that of other North Atlantic banks). Roubini:

RGE - It Is Time to Nationalize Insolvent Banking Systems

our latest estimates RGE Monitor (available in a paper for our clients) suggest that total losses on loans made by U.S. financial firms and the fall in the market value of the assets they are holding will be at their peak about $3.6 trillion. The U.S. banks and broker dealers are exposed to half of this figure, or $1.8 trillion; the rest is borne by other financial institutions in the US and abroad. The capital backing the banks assets was last fall only $1.4 trillion, leaving the U.S. banking system some $400 billion in the hole, or close to zero even after the government and private sector recapitalization of such banks. Thus, another $1.4 trillion will be needed to brink back the capital of banks to the level they had before the crisis; and such massive additional recapitalization is needed to resolve the credit crunch and restore lending to the private sector. So these figures suggests that the US banking system is effectively insolvent in the aggregate; most of the UK banking system looks insolvent too; and many other banks in continental Europe are also insolvent.

Even allowing for a Roubini Doom-squared Factor™, we have to assume the rot has gone far. So the audit will establish that. Then, you say, Geithner's brilliant plan is that he'll nationalise. My question about that was, why the need for the Trojan Horse? Even supposing it's a smart way of proceeding, why the need to announce the toxic-asset buy-up PPIF with up to a trillion to spend? Is involving the private sector in buying those assets with public money "leverage" part of the subtle plan to nationalise?

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 11th, 2009 at 05:17:13 AM EST

Is involving the private sector in buying those assets with public money "leverage" part of the subtle plan to nationalise?

Looks like it, wit hthe added fig leaf that it will be the private sector that gives a value to things, and not some evil bureaucrats, because one is so much more competent than the other at doing that for the common good.


In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Feb 11th, 2009 at 05:25:19 AM EST
[ Parent ]
So in what order is this supposed to proceed? Audit -> nationalisation -> subsidised evacuation of toxic assets?
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 11th, 2009 at 05:36:29 AM EST
[ Parent ]
I think so.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 06:11:04 AM EST
[ Parent ]
The function of the PPIF is to sell the state-owned toxic assets to the private sector at the private sector's price, and make up the shortfall with public money?

Why the need for this separate fund, once the banks are nationalised?

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 11th, 2009 at 06:39:33 AM EST
[ Parent ]
My question would be, why the need for the banks to sell the toxic assets after their balance sheets have been "buffered" with the public injection after the audit? The fact sheet says:
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.
The "stress test" is supposed to have determined
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
and, if they don't have that capital, to
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.
Once this buffer is in place to "help absorb losses", why is it needed to get rid of those assets?

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.
I am not so sure that banks should be allowed to bundle loans and sell them off. Banks create money when they make a loan. That's a privilege and that's why they are regulated. IMHO you shouldn't be able to sell a loan to an unregulated entity (i.e., to a non-bank).

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 07:05:25 AM EST
[ Parent ]
Banks create money when they make a loan. That's a privilege and that's why they are regulated.
Moreover, they are regulated because otherwise the monetary authorities lose control of money creation.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 07:13:56 AM EST
[ Parent ]
Your question is another expression of the concern that led to mine: if the aim Geithner is pursuing is backdoor nationalisation (and I have no problem understanding that he isn't going to go yelling swearwords like nationalisation all over the place), then the audit is a handy means to that end.

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?

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 11th, 2009 at 07:47:03 AM EST
[ Parent ]
is who pays for all the losses from the toxic assets. It's one thing to identify how much the losses are (ie finding willing outside investors to buy them), and another to allocate the losses - remeber that these are potnetial losses, not realsied ones, and they may end up being higher or lower:

  • one part of the allocation is the price at which assets are sold: if high enough, it means the buyers are taking some of the risk; if low, it means it is fully borne by the sellers

  • then the main allocation is the loss between the banks and the State entity which backs the scheme up, and inside the banks, between shareholders (already largely wiped out), preferred lenders (including the government, form previous capital injections), bondholders/senior creditors;

  • note that there can be a separate allocation of any potential upside as well, which will have significant depending on the price agreed to above.


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 11th, 2009 at 08:20:29 AM EST
[ Parent ]
You only need to realise the losses by selling the assets if you want to open up room in the balance sheets for more lending (sell off the bad loans so you can give out more loans).

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

by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 10:08:38 AM EST
[ Parent ]
Stabilisation is needed in the interbank market for normal lending to re-start. Right now, banks do not trust one another, and thus do not fund one another.

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

by Jerome a Paris (etg@eurotrib.com) on Wed Feb 11th, 2009 at 10:27:30 AM EST
[ Parent ]
But is this really the best of all possible ways to clean up the banks?

Or at least, to clean up the banking functions which they're supposed to perform - which may not be the same thing.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Feb 11th, 2009 at 06:18:40 PM EST
[ Parent ]
Yes. But if nationalisation is Geithner's aim (as you too seem to be claiming), then where is the need for this "State entity" (aka PPIF)?

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.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 11th, 2009 at 10:13:57 AM EST
[ Parent ]
it is not necessarily by Geithner. A theory I was told is apparently making the rounds in Brussels is that he is being set up as a goat, ie his plan will fail, and will make it politically possible to go for a more radical plan. Some people in Brussels seem to think he won't be around in a few months' time.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 11th, 2009 at 10:29:19 AM EST
[ Parent ]
I wouldn't be at all surprised that he should disappear within a few months.

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.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 11th, 2009 at 11:29:08 AM EST
[ Parent ]
It's a nice theory - but why set up someone to fail? There would have to be a political advantage of the 'We tried it your way - now let's try my way' kind.

What evidence is there that Obama works like that, or has ever worked like that?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Feb 11th, 2009 at 06:21:40 PM EST
[ Parent ]
Having Watched the Iraq war, I'm sure that would result in, "you havent tried it our way for long enough" as a response till the next presidential  election where he would loose as the recovery would be perpetually round the next corner.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Wed Feb 11th, 2009 at 08:44:15 PM EST
[ Parent ]
Concerning the losses on the assets.

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)

Humans are incapable of solving the problems they create.

by THE Twank (yatta blah blah @ blah.com) on Wed Feb 11th, 2009 at 10:34:47 AM EST
[ Parent ]
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.
I think the point is that the "capital injection" will not be nationalisation yet because it will be debt (admittedly, convertible to equity), not equity. As such, there will be no public control.

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

by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 09:51:16 AM EST
[ Parent ]
Excellent comment. But the notion that Geithner is cunningly aiming at nationalisation is (it seems to me) going further and further adrift the more we discuss this.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 11th, 2009 at 10:21:31 AM EST
[ Parent ]
Yes, you're right.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 10:22:11 AM EST
[ Parent ]
Banks are not lending right now for two reasons:
  • they have liquidity problems, because the market is closed, because banks do'nt trust one another (for good reason);
  • they are risk adverse, and see the recession as a reason to restrict lending anyway;

Solving the banking crisis will reduce the acuteness of the first one, but will do little for the second, which is set to worsen.

So we may switch one credit crunch for another...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Feb 11th, 2009 at 10:31:47 AM EST
[ Parent ]
But the second credit crunch is amenable to standard Keynesian shock therapy...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 11:03:23 AM EST
[ Parent ]
afew:
as long as public and private investors take the same risk pari passu

Which is exactly what I propose through a "Capital Partnership"

1/ Put the assets and liabilities in custody.

2/ Share the revenues between Managers/Staff (Human Capital aka Labour) and Investors (Financial Capital) proportionally.

Share the defaults (ie losses of financial capital) proportionally aka pari passu among the investors.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Feb 11th, 2009 at 05:39:40 AM EST
[ Parent ]
Yes, but you propose to put them in custody.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 11th, 2009 at 06:40:53 AM EST
[ Parent ]
Maybe you ae not aware that virtually all stocks and shares are held by nominees and custodians?

Institutions don't trade shares - they trade the beneficial interest in the shares...

Nothing new there.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Feb 11th, 2009 at 07:04:39 AM EST
[ Parent ]
I wasn't clear. I meant that I don't see any proposal in Geithner's plan to put the problematic assets in custody, as you would propose doing.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 11th, 2009 at 07:32:43 AM EST
[ Parent ]
Many people on the "left" consistently underestimate the dangers for a government like this which is always a few steps away from an insurgency involving the corporations, military, and media.
by rootless2 on Wed Feb 11th, 2009 at 09:11:46 AM EST
[ Parent ]
Nothing destroying a couple of hundred oligarchs won't fix.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Feb 12th, 2009 at 04:13:41 PM EST
[ Parent ]
Not having TribExt, since i don't use Firefox, it's not easy to run around giving +4s to many of the comments which deserve it.  So i'll simply say, the diaries, comments and discussions here are particularly informed, useful and interesting.  They represent what is best about ET.

I'm pleased to be able to continue my learning here, and want to thank all of you for such high-level discussions.

nice to see Metatone back as well.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Wed Feb 11th, 2009 at 07:52:39 AM EST
Seeing Michael Moore is requesting help with a film about the financial system on The big Orange place, has anyone emailed him to tell him about the information on offer here?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Wed Feb 11th, 2009 at 11:32:28 AM EST
[ Parent ]
Michael Moore is requesting help with a film about the financial system on The big Orange place
Link?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Feb 11th, 2009 at 11:43:26 AM EST
[ Parent ]
Link here.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Feb 11th, 2009 at 11:45:40 AM EST
[ Parent ]
Sorry I missed it out, (not to shock you all but I'm busy writing a diary and got sidetracked)

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Wed Feb 11th, 2009 at 12:21:05 PM EST
[ Parent ]


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