Rotten tomatoes for TARP II
Martin Wolf writes in today’s Financial Times:
The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets.
Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it.
To which Clive Crook replies, with some regret:
It is true that the biggest mistake the administration can make is to do too little. The point is, it may have no choice but to do too little.
Tyler Cowen offers possible explanations:
2. The economists offer up coherent plans, but they are then bogged down by the input of competing advisers and Karl Rove-like politicos.
3. The goal of the various plans has been to confuse Congress.
4. The Republicans were just stupid and irresponsible and now the Democrats are smart but they lack experience at the rudder and they need another try to get it right.
5. The Republicans were just stupid and irresponsible and now the Democrats are just stupid and irresponsible.
6. The Obama team is brilliant and we are the silly ones who insist on imposing simple narratives on all policy actions. Good policy should be difficult to understand.
7. The Democrats made the mistake of setting an artificial deadline and by the time it came around they realized they had nothing so they put up what they had, which wasn’t much.
8. We need to re-benchmark our expectations because the world doesn’t work as well as we used to think. What we used to consider “bad policy” is, in reality, compared to the relevant alternatives, “reasonably good policy.”
9. U.S. banks are insolvent but we can muddle through if we ignore that fact and let them evolve back into solvency. What we need is a plan which lacks transparency and Geithner delivered.
10. All of the above.
While Yves Smith looks inside Geithner’s head:
Thus Geither’s belief that government can’t manage assets is sheer projection of his own inability to deliver. The FDIC winds up banks all the time. During the S&L crisis, as William Black reminds us, FSLIC appointed receivership managers that later research determined did reduce losses. Sweden, Norway, and Chile all nationalized (and relatively quickly reprivatized) dud banks during their financial crises. This isn’t like trying to go the moon (which was a government initiative, lest we forget). There are plenty of models and lots of good proposals. What is lacking is will. History says that an aggressive, take-out-the-dead-banks program is the fastest and all-in cheapest way out of a financial crisis. But if you believe that something will not work, as Geithner does, it isn’t at all hard to produce that outcome.