Just checking in with some comments on Secretary Geithner’s plan.
The popular narrative is that the market was so unhappy with the lack of specifics in the plan that it sold off 5%. I understand that the public and the media want everything spelled out, even though reality dictates that solutions to the economic plan have to be dynamic.
I think the major take away from the plan is that big banks are not going to be permitted to fail, that the government will not nationalize and will not own and operate banks. They have been saying this under Paulson, but no one seems to believe, necessitating its constant repetition.
I think the plan is ok. First, it uses existing $350 million left in TARP to partner with investment groups to acquire what everyone calls “toxic assets.” There has been a deafening din about valuation under the good bank/bad bank debate in Congress, television, on blogs, etc. Nobody wants the government to pay too much and reward those rotten bankers. Everybody, including Nobel Prize winning economists Krugman and Stieglitz blithely demand that the valuation be based on market price, but it seems that only Geithner and the bankers (and me) know that there is no market, that there is no one to trade with, no one to put up capital. By partnering with private capital and guaranteeing a valuation based on long-term returns rather than fire-sale prices, the Treasury can revive a moribund market. I think this will succeed and put a floor under these assets and trading will resume.
Secondly, under the plan, TALF sets aside $100 billion of Treasury money which creates $1 trillion of money available to buy credit card, auto and student loans. This is really significant and will start soon.
Thirdly, a “stress test” for banks to see if they can be restored to health, if they are curable. Who can complain about that?
Finally, a promise to set aside $50 billion for foreclosure relief to homeowners – ok to have no specifics – because Congress is involved in the formulation of the plan, not Treasury alone.
There’s a tremendous amount of national anger and ignorance. Legislators themselves are unable to process the amount of information required to understand this very complex problem, and all are quoting constituents who are angry but have absolutely no understanding of what’s going on. They rail about corporate jets, and bonuses etc. – legitimate perhaps – but representative of a greater societal problem which has gone on for a long time.
The Geithner plan is a middle-way solution that deserves much more credit than it has received but it will require time to be implemented and to work out. As you know, the markets generally want instant gratification which they didn’t get yesterday, but things should stabilize as people learn more about it and as it kicks in.
The key takeaway: The large banks will not be allowed to fail! Taxpayers will be protected, somewhat.
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