Original Link: http://riverdaughter.wordpress.com/2009/03/21/zombie-banks-must-die/
Well, the Obama administration has decided to take the Zombie route which is something I’ve repeatedly argued against. But why just take my word for it? Let’s start with Nobel prize winning economist Paul Krugman reporting on his NY Times blog today in a thread aptly titled Despair over Financial Policy.
The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.
The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
Just about every economist and financial blog on the web, especially the progressive ones, have warned against this option since similar plans put Japan into its lost decade of recession, high deficits, unemployment, and financial malaise. This is worse than I even expected of the Obama administration. This basically means more BIG subsidies for BIG investors. It is nothing less than a massive transfer of wealth to the people and institutions most responsible for this mess from those of us that will suffer the most and have the most to lose. This threatens our jobs, our children’s future, and our country’s standing as the world’s largest single country economy. This is THE single worst possible decision.
This from Calculated Risk:
With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.
From Yves Smith Naked Capitalism:
The New York Times seems to have the inside skinny on the emerging private public partnership abortion program. And it appears to be consistent with (low) expectations: a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for crappy paper.
The three-pronged approach is perhaps the most central component of President Obama’s plan to rescue the nation’s banking system from the money-losing assets weighing down bank balance sheets, crippling their ability to make new loans and deepening the recession….
The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.
Yves (SMITH) here. If the money committed to this program is less than the book value of the assets the banks want to unload (or the banks are worried about that possibility), the banks have an incentive to try to ditch their worst dreck first.
In addition, it has been said in comments more than once that the banks own some paper that is truly worthless. This program won’t solve that problem. Back to the piece:
In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.
Yves here. Hiring asset managers to do what? Some investors get 85% support (more as is revealed later), others get dollar for dollar? This makes no sense unless very different roles are envisaged (but how will the price for assets given to the asset managers be determined? Or are these for the off balance sheet entities that should be but are still not yet consolidated, like the trillion dollar problem hanging around at Citi?) Back to the article:
In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Secure Lending Facility, a joint venture with the Federal Reserve.
Yves again. While the first TALF deal got off well, Tyler Durden points out its capacity is 2.7 times pre-credit mania annual issuance levels, which means the $1 trillion considerably overstates its near term impact. And credit demand by all accounts is far from robust. Cheap credit is not enticing in an environment of weak to falling asset prices and job uncertainty.
And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!
Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.
Later in the article, there is language that intimates that the banks will put up assets and take what they get. However, the failure to mention a reserve (a standard feature in auctions) does not mean one does not exist. Or the alternative may be, since bidding will almost certainly be anonymous, is to let the banks submit a bid, which would serve as a reserve. That is the common procedure at foreclosure auctions, when the bank puts in a bid equal to the mortgage value (so either a foreclosure buyer takes the bank out or the bank winds up owning the property).
From Financial Armageddon:
No Surprise to Anyone
If there is anything to be learned from the current crisis, it is the fact that Washington has a habit of screwing things up.
From setting up corrupt and self-serving government-sponsored enterprises that fail to accomplish their stated goals, to ill-conceived and underfunded insurance schemes, guarantee programs, and safety nets that don’t provide the benefits claimed, to rules and regulations that leave those who are “protected” high and dry, it’s amazing how often good intentions go wrong when the politicians are in charge.
From George Washington’s Blog:
Does a Single Independent Economist Buy the Geithner-Summers-Bernanke Approach?
On the left, you have:
Nobel economist Joseph Stiglitz saying that they have failed to address the structural and regulatory flaws at the heart of the financial crisis that stand in the way of economic recovery, and that they have confused saving the banks with saving the bankers
Nobel economist Paul Krugman saying their plan to prop up asset prices “isn’t going to fly”. He also said:
At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis — that they believe that all we have is a liquidity crisis that can be undone with a bit of financial engineering, that “governments do a bad job of running banks” (as opposed, presumably, to the wonderful job the private bankers have done), that financial bailouts and guarantees should come with no strings attached. This was bad analysis, bad policy, and terrible politics. This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers.
Prominent economists like Nouriel Roubini, James Galbraith, Dean Banker, Michael Hudson and many others slamming their approach
On the right, you have:
Leading monetary economist Anna Schwartz saying that they are fighting the last war and doing it all wrong
Former Assistant Secretary of the Treasury and former editor of the Wall Street Journal Paul Craig Roberts lambasting their approach Economist John Williams saying “the federal government is bankrupt … If the federal government were a corporation … the president and senior treasury officers would be in federal penitentiary.”
Prominent economist Marc Faber and many others tearing their approach to shreds.
Of course, other Nobel economists, high-level fed officials, former White House economist, and numerous others have slammed their approach as well.
Sure, the economists for the banks and other financial giants which are receiving billions at the government trough think that the Geithner-Summers-Bernanke approach is swell.
And perhaps a couple of economists for investment funds which use their giant interventions into the free market to make some quick money.
But other than them, no one seems to be buying it.
I may be one of the few in the chorus singing soprano, but I’m in a very huge chorus singing sfz! that this is the worst possible of ALL choices. This is nothing more than a wealth transfer that will accomplish nothing other than keeping banks and financial institutions that are basically bankrupt on life support long enough to drain the daylight out of any recovery. This President is AWOL from his job. Not only is he AWOL, but he is incompetent. He can go on Leno, he can go on sixty minutes, he can give lavish St Patrick’s Day parties and he can hold town meetings in California but he is totally incapable of staying in Washington and doing his job.
By allowing this, he will have stolen more from every single honest taxpayer in this country than even Darth Cheney and the Texas Village idiot did with their adventures in nation building and subsidy of the oil and gas industries and the military industrial sectors. If somebody in Congress doesn’t act to stop this, I say we start calling them to demand impeachment proceedings. We’ll be lucky if we come out of recession by the time my daughters reach retirement.
There I said it. If President Obama doesn’t stop this nonsense now he should be impeached for criminal misuse of tax payer’s money.