Krugman Wonders What Geithner Means
Like everyone else, Paul Krugman can’t quite tell what it is Timothy Geithner’s “plan” is supposed to be. But he agrees that there seems to be some chance that there’s backdoor nationalization in the scheme:
Stress test: everything depends on how this is actually implemented. What happens if, or more likely when, a major money center bank is stress-tested and found to have negative net worth? One possibility is that the auditors are told to come up with a different answer; that’s a big concern. The other is that the bank is effectively nationalized; as I read the language that could be achieved as part of the public capital injection.
So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place.
My read of the situation is that this isn’t an epistemic problem where we don’t know what the real plan is; rather the plan is just undefined. What was announced today leaves the door open to handling this the right way. Unfortunately, it also leaves the money open to the dread zombie bank scenario.
40 Responses to “Krugman Wonders What Geithner Means”
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February 10th, 2009 at 6:17 pm
How about bankruptcy for the worthless banks?
February 10th, 2009 at 6:32 pm
The way bank nationalization is thrown around as the solution to the banking crisis strikes me as similar to the way some on the right thought of invading Iraq as a solution to the problem of Saddam.
I’m not suggesting there is a moral equivalence or trying to start a flame war. But as with the Iraq war, nationalizing the banks is only the beginning and isn’t really the solution. If we are to Nationalize the banks we need a solid plan and framework for operating them and an exit strategy. So far the level of detail discussed on how we will make nationalization work reminds me of post invasion occupation planning that amounted to little more than fantasizing about parades and lorals.
February 10th, 2009 at 6:41 pm
What does Matt want? Nationalization is unlikely to begin with and even if it were to occur the investors would be compensated and it would be temporary. And how exactly would this de facto nationalism, were it to occur, led to the Europeanization of America? I can’t help wondering whether Matt’s persistent posting at even the slightest hint of nationalization has more to do with some weak populist argument than with what’s best for America.
February 10th, 2009 at 6:43 pm
I don’t why Matt thinks nationalization is such a good deal. There’s little psychic satisfaction in screwing the shareholders out of what little value remains, especially as the price paid is the public taking on huge liabilities. Let them fail. These big banks have dominated the whole discussion for over a year and I’m tired of it. Obama/Geithner have to get over it and realize there’s life after Citigroup, BAC, JPMorgan, etc.
February 10th, 2009 at 6:48 pm
Just remember that the bank stocks were the ones bringing down the DOW today. What that means is that the shareholders think their stocks are getting worthless, which means that they are anticipating a nationalization. Because without the government’s $$ those shares would be worthless, so its time we stopped getting the bank’s shareholders rich and started fixing the problems!
Of course people will spin this to say that the “markets” didn’t like the plan, but if you look at which stocks went down today it was the financial.
Biggest losers on DOW today: American Express, B of A, Citigroup, and JP Morgan!
February 10th, 2009 at 6:49 pm
Some of the opacity surely stems from the mysterious bad assets that no one can value. There seems to be a need to get inside some of these bank balance sheets to see just what lives on the asset sides.
for wiley, “bankruptcy” for the worthless banks brings the FDIC into the mix, since depositors have to be kept whole. Where is the FDIC in all this? Since the upper limit on deposit insurance has only recently increased to $250K, FDIC reserves would probably be quickly swamped by badly underwater banks with sizeable insured liability portfolios. I assume nationalization is an alternative to seizure and resolution by the FDIC, a way to keep the system running without destroying the deposit insurance agency (while also easing the absorption of the asset side of these fouled up banks).
February 10th, 2009 at 6:50 pm
I can’t speak for MY, but the reason I’m invested in nationalization (or bankruptcy — I think it comes to much the same thing) is just that I want this to be over. And I have a feeling that all the other alternatives amount to kicking the can down the road.
I don’t want to screw shareholders out of anything. But I also don’t particularly want to see the taxpayers transfer hundreds of billions of dollars *to* the shareholders, which seems to be the practical implication of plans that center on buying toxic assets.
February 10th, 2009 at 7:03 pm
I want this to be over. And I have a feeling that all the other alternatives amount to kicking the can down the road
Amen. The fastest path to liquidity is the right one. No matter who takes it on the chin. Especially if all the tax cuts currently larding up the stimulus are going to have any effect at all. This misery is far from over. New storms are coming. Watch the State Senate in Nevada dance around trying to figure out a way to not raise taxes. An entire industry disappeared overnight in several major cities. You think job losses in real estate and construction in these places are high now, wait until the market finally bottoms out. If “Green Tech” is the plan for the next stage of growth, credit needs to flow. Venture capital needs to flow.
February 10th, 2009 at 7:04 pm
So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place.
Ssshhhhhhhhhh. It doesn’t work if you talk about it.
Seriously, maybe the vagueness is an intentional tactical ambiguity designed to scare private capital into putting more private money into the system and loosening up.
February 10th, 2009 at 7:06 pm
Right now there is an underlying assumption in the market that we don’t know which banks are insolvent, and so private investors are fleeing from all of them. The banking sector today was hit hard across the board. The intention of having a so-called stress test is to clearly separate the healthy from the sickly. Wall Street would prefer that the government just buy up all the toxic assets, but besides being foolhardy we couldn’t afford it anyway.
I’m hoping that the stress testing will allow Treasury to perform some sort of triage, so it doesn’t waste money trying to save the hopeless cases. Those banks should be seized and closed. Eventually, though, I think the government will be faced with what to do with BofA or CitiGroup, banks that may be too big to fail but too sick to survive. If the government is not able to quickly break them up and sell off the pieces, they may well be forced to nationalize them in the interim. There may be more of a stomach for nationalization if it is clear that the government considered all other available options first.
February 10th, 2009 at 7:06 pm
I’ve always considered them “Dread Zombie Banks’, just not OUR Dread Zombie Banks.
February 10th, 2009 at 7:17 pm
Note that Mike M. describes sort of the inverse of the dot.com bubble — nobody knew which dot.com undertaking was going to thrive, so people rushed into all of them. just sayin’
February 10th, 2009 at 7:44 pm
The large commercial banks, investment banks, hedge funds and private equity funds have been little more than parasites for the last 20 or so years. They have been using public funds via leverage to suck money out of the real economy instead of providing funding for productive ventures. This happened partly because Rubin’s strong dollar policy badly handicapped industrial ventures.
Once Citi, BofA, etc. are gone, their kind won’t be back and the financial sector will be half what it was.
Good Riddance!
February 10th, 2009 at 7:50 pm
I’m no expert, but it sure seems like Geithner’s plan allows for both optimistic and pessimistic scenarios. Best case scenario: the banks are solvent, this is a crisis caused by fear, nationalizations aren’t necessary and the ensuing complications are avoided. Worst case scenario: the banks are insolvent, and nationalizations are possible using the backdoor method MY and Krugman have noticed. Just like you don’t want to close your eyes and hope for the best, you don’t want to assume the worst and do unnecessary damage up front. Geithner’s plan doesn’t make it clear which will ultimately happen, but that’s because no one knows for sure what the banks’ balance sheets look like right now. So what am I missing?
February 10th, 2009 at 7:55 pm
Krugman is just being polite.
For Geithner’s plan to result in nationalization: (1) toxic assets must be valued at market, which means that all six of the largest banks are, or soon will be, insolvent; (2) huge amounts of public capital must be invested, because private capital won’t be forthcoming; (3) current management must be moved out; and (4) the banks must be subjected to heavy regulation. If you think any of this is likely to happen behind closed doors between Geithner and his buddies, I have a bridge to sell you.
Atrios has it right: We can nationalize, or burn a pile of money then nationalize. Geithner’s plan to me sounds like the latter.
February 10th, 2009 at 8:12 pm
…Naomi Klein, The Shock Doctrine, p. 158
February 10th, 2009 at 8:20 pm
Seriously, maybe the vagueness is an intentional tactical ambiguity designed to scare private capital into putting more private money into the system and loosening up.
Tim Geithner is smart, and he is ruthless. I wouldn’t put something like that past him.
February 10th, 2009 at 8:21 pm
Personally, though, I am fine with the plan making use of the funds it already has available, and for taking something on the order of a few weeks to make a go of it. But if it is a couple months from now and people are starting to talk about hundreds of billions or maybe trillions of new appropriations to keep the more optimistic scenarios alive, then it may be time to pull the plug.
That makes sense to me, but am I right in reading a lot of the “Nationalize now!” arguments as being rooted in an unfounded (if understandable, given the events of the last few months) assumption that all the big banks must be insolvent, just because?
February 10th, 2009 at 8:21 pm
People here seem to be confusing two different sets of Bad Banks. As i noted, there are some small to medium sized D or E rated banks that have a high ratio of bad real estate loans relative to bank assets. FDIC is handling those as they sink or swim.
But the huge fucking elephant that I think the politicans are referring to is the Five Big Banks that are holding almost $170 TRILLION in derivatives contracts. If those banks (JP MOrgan, Bank of America, Citibank, Wachovia/Wells Fargo, and HSBC USA ) crash and burn then who pays off those derivatives? Can you say “counterparty risk”??
As I recall , the OCC report says about $50 Trillion of those derivatives contracts are coming due within the year. The rest in the next few years. Who is going to make good on them?
February 10th, 2009 at 8:49 pm
assumption that all the big banks must be insolvent, just because?
I think you would have a hard time finding many who think the big banks are solvent. There certainly are millions of people, via the markets, indicating that they have their doubts.
Who is going to make good on them?
You are. We Are. For the rest of our lives.
Obama and Geithner will be compensated for their fine work after 2012.
February 10th, 2009 at 9:10 pm
Jane Hamsher
I wish I had a direct quote, but here:
…JH
It’s a stall, a matter of timing. The “Fiscal Responsibility” summit is scheduled for February. Obama has two more prime time speeches?
They need to slash Medicare and Social Security before all the pension funds and 401-ks collapse with the bank failures. A matter of months now.
Obama is the real neo-liberal Shock Therapy deal.
February 10th, 2009 at 9:33 pm
bob mcmanus: Structural adjustment and austerity for thee, but not for we…
February 11th, 2009 at 7:22 am
Obama is the largest recipient of Wall Street bribes in history.
Consider carefully just who he has appointed.
Do you seriously believe he will do anything but attempt to make good the losses of our Masters? Yes there will be just enough table scraps to stave off blood in the streets, well at least in the decent neighborhoods.
And it gets better.
Ain’t it great that we have a progressive Black president whose fault all this is?
The Republicans warned you the n***** would fuck up the economy.
And the infinitely wise markets have passed judgment:
The Obama presidency is a failure!
February 11th, 2009 at 8:13 am
Does calling the president a nigger warrant banning, or what?
Come one, Matt, pick up the trash.
February 11th, 2009 at 8:29 am
Does calling the president a nigger warrant banning, or what?
You must be new here.
February 11th, 2009 at 8:47 am
Epistemological, not ‘epistemic.’
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