I'll give Simon Johnson one thing: he's great at knocking down straw man arguments. Today's straw man is Treasury's alleged "wait and see" policy on the banks. Johnson and Peter Boone claim on the NYT's Economix blog that Treasury's plan is to "look the other way on big banks' problems and hope an economic recovery brings them back to sustained profits." They then proceed to show why this "wait and see" policy is a bad idea. Clever! Too bad it's just not true. How any semi-informed commentator could describe Treasury's approach as "wait and see" is beyond me. Treasury has adopted a multifaceted approach to the major banks, which includes the Capital Assistance Program (CAP), as well as the Public-Private Investment Program (PPIP), which encompasses the Legacy Securities Program and the Legacy Loans Program. What do Johnson and Boone propose? Something eerily similar to what Treasury has already proposed:

We know there is a problem in the banks, just not how large it is. So why not do more than is absolutely necessary, in terms of forcing restructuring and recapitalization of the sector (ideally with private money)? Give everyone certainty that the problems are over once and for all.
Gee, that sounds an awful lot like Treasury's Capital Assistance Program, which is designed to determine how large the problem in the major banks is, and then force each bank to recapitalize — "ideally with private money," but if that's not possible, then with government money. As for forced restructurings, Treasury currently lacks the legal authority to do that, but it has already proposed a new resolution authority for large bank holding companies. (I personally don't think the proposed resolution authority can work, but you can't say that Treasury isn't trying to acquire the legal authority to force restructurings of major bank holding companies.) Oh yeah, and then there's the $1 trillion PPIP, which I hear is kind of a big deal. Whatever you may think of Treasury's approach to the banks, it's hardly "wait and see."

5 comments:

Don said...

I think that it really has to do with what we expect at the end of this crisis. Johnson believes that it will be a very similar arrangement to what we had before this crisis. That is, in my opinion, one way to look at things. Geithner seems to be saying that, in fact, when he talks about the role of the private sector, etc.

I am in the odd position of defending Geithner for pragmatic reasons. However, I could be wrong, but I believe that he and Bernanke would be open to large changes in our system. But I'm reading between the lines and reading a lot into their past speeches.

I agree with Johnson's critique. We have had a Welfare State in which some interests, faux free marketers, have been very effective in influencing the government, especially during the Bush years. I call it a Crony Welfare State.

We're still going to have a Welfare State after this, but we can make changes that will better serve our country. I'm for Narrow Banking, an idea put forward by those communists Friedman, Knight, Simons, and Fisher. We should also have a self-insured, supervised,not government guaranteed financial sector.

I'm also a follower of Edmund Burke. I don't believe that Politics and political Theory are the same thing. Politics is the art of the possible. Hence, I can support policies that I do not completely agree with.

In that sense, I would expect Geithner to be saying what he is saying, even if he agreed with me, which I doubt. What I take Johnson to getting at in "Wait & See" is that we're wasting our one chance to change things. I don't agree, but I understand and share his concern.

The changes, so far, have weakened the crony system, but there is a lot of work to be done. I would mention one area of disagreement with Johnson and Kwak: the issue of bondholder's rights isn't the same issue as the power of banks. William Gross is correct to be worried about the consequences of wiping out bondholders. I simply believe that, once taxpayers are involved, they are more important than bondholders. But it is not in our interest to imply or assert that the interests of bondholders, who are often lending money so that our businesses can expand and hire more people, are not essential.

So, I'm suggesting that in Chrysler and PPIP, etc., bondholders should be taken care of unless it really makes the taxpayers situation worse off, given an analysis of the trade-offs.

Don the libertarian Democrat

shtove said...

Enjoying the blog. Thanks.

Look forward to your post on the Cuomo letter. I guess if a prosecution were in the pipes he wouldn't be airing his findings in public.

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