Saturday, April 11, 2009

Geithner and Obama Keep Policy of Supporting Zombie Banks

Original Link:,C,XLF,FAZ,SKF,JPM,%5EDJI

by Aaron Task

The stock market gave Tim Geithner's new "Financial Stability Plan" a rousing Bronx cheer on Tuesday. For most, the disappointment was either over the lack of details on the plan, specifically over the structure of the public-private investment fund the Secretary proposed to buy banks' toxic debt.

But at the end of the day, the real problem with Geithner and Obama's new plan is that it doesn't deviate from the "too big to fail" doctrine followed by Paulson and Bernanke, prompting The FT's Martin Wolf to ask if Obama's presidency has already failed.

Yes, banks will be subject to a "stress test" under the new plan, but there's no evidence those who fail the test will forced into FDIC receivership, declared insolvent and/or otherwise be nationalized.

In this critical regard, Obama and Geithner's policies continue to evince a massive disconnect between the economic reality - some big banks are insolvent - and the fanciful idea that the problem is just one of liquidity and confidence, i.e. the belief toxic assets are merely temporarily mispriced and might someday return to their peak values, or thereabouts.

Unless and until policymakers and politicians are willing to face up to reality, we are simply repeating the same mistakes Japan made in the 1990s and allowing "zombie" banks to live off the government's largess.

These banks will have an insatiable appetite for funds and, like all zombies, will try to eat our brains. From the looks of what's coming out of Washington, maybe they already have.

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