Stiglitz Calls Geithner Plan “Robbery of the American People”
I think Joe Stiglitz is being a bit unfair here:
The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.
“Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”
It’s a bit more subtle than that. The government is guaranteeing private investors against downside risks but has secured for itself a fair share of the upside. In other words, you have a situation where the private investors are taking a chance of a small loss in exchange for the opportunity at a big win. The government is taking a chance of a large loss in exchange for the opportunity of a big win and giving up all the autonomy and decision-making power in the meantime. In one scenario, taxpayers and investors alike make a bunch of money. In another scenario, taxpayers lose a ton of money—many hundreds of billions—and investors lose a small amount. It’s a bet that looks fair if (a) you think the win-win scenario is much more likely than lose-lose, or (b) you think the social gains from creating recapitalized banks exceed the fiscal cost to the taxpayers of suffering through lose-lose. Option (a) seems like wishful thinking, but option (b) is perfectly reasonable. The unreasonable thing here is that the Geithner Plan seems to allocate an unreasonable large share of the social gains of recovery back to the financier class. So I think Stiglitz is only being slightly unfair.
Meanwhile, I actually think the most distressing thing about the criticism from folks like Krugman and Stiglitz is what you can infer reading between the lines from how ferocious it is. They, and other leading critics, are acting like people who’ve been totally shut out of the consultation/communication loop. And it’s distressing to see people of their stature and expertise getting shut out while the administration works harder on kissing Wall Street’s ass to try to persuade the finance class to avoid deliberately sabotaging the economy.
The Obama administration seems to respond to criticism from the right by turning the other cheek and becoming more solicitous, while responding to criticism from the left by putting its fingers in its ears.
73 Responses to “Stiglitz Calls Geithner Plan “Robbery of the American People””
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March 24th, 2009 at 2:07 pm
i can’t speak about stiglitz, but let’s not get too complicated here: krugman believes that anything short of receivership is a dumb-fuck idea doomed from the start.
he may well be right (i doubt it, but i don’t really know, and it’s not like i’m going to claim that my analytic powers are greater than krguman’s).
but the administration has quite obviously decided that it isn’t going to go down that path (at least at this time, and possibly ever).
so what’s to talk about?
i think, in short, that krugman is ferocious not because he has been excluded; he’s ferocious because he very, very, very, very strongly believes that we are pursuing the wrong path.
March 24th, 2009 at 2:08 pm
“The Obama administration seems to respond to criticism from the right by turning the other cheek and becoming more solicitous, while responding to criticism from the left by putting its fingers in its ears.”
Or, put more succinctly, they’re Democrats.
March 24th, 2009 at 2:11 pm
Isn’t it equally distressing that Stiglitz and Krugman, two Nobel-prize winning economists, are making arguments based on professional envy rather than, you know, economics?
March 24th, 2009 at 2:15 pm
Jesus Christ. Let’s say I go to someone and say “Hey, I’ve got to make an investment for the future, and I want you to help. If you give me five dollars now and watch over it for me, I’ll put in 95 dollars (even though I could pay it all if I wanted!), and this pays off, I’ll give you half the profit.”
How does this imply I expect to actually make money? It implies that I expect to lose money and want to ameliorate my losses by dragging in someone else. So why do people keep saying that Geithner expects a win-win? Am I just completely stupid?
March 24th, 2009 at 2:19 pm
Obama doesn’t need to persuade Krugman or Stiglitz to get anything done. He does need to persuade either some Republicans or some of the douchebag Democrats who don’t realize they won the 2008 election.
March 24th, 2009 at 2:19 pm
The Obama administration seems to respond to criticism from the right by turning the other cheek and becoming more solicitous, while responding to criticism from the left by putting its fingers in its ears.
What is that even supposed to mean? Obama implemented the stimulus bill (even the tax cuts portions were skewered towards the working and middle class). He is pushing for national health care. He is trying to reverse the odious Bush tax gifts for the rich. He removed the ban on funding stem cell research. He is pushing infrastructure and education spending. He is trying to push a clean energy policy. Not listening to the left, indeed! I mean all of these are conservative dream projects, right? WTF does the left want? An October revolution?
And Krugman has been acting like a shit-head. I think it has nothing to do with being shut out and everything to do with his personal beef with Obama.
March 24th, 2009 at 2:20 pm
WHS, you’re not completely stupid: it’s a very complex matter.
what the geithner plan is doing is finding a way to leverage limited government dollars to recapitalize the banks by likely overpaying for assets.
however, who really knows if we are “overpaying” for assets: not all mortgages won’t be paid off. not all house prices are going to zero. not all jobs are going to be lost. assumptions about the value of portfolios over time that none of us has seen are just that: assumptions.
so the further geithner assumption is that if you give the biggest sharks an incentive to try and make money on the drek, there’s a not insubstantial chance that they will.
if not, we’ve recapitalized the banks by overpaying. i’m still not sure why that’s supposed to be so dramatically worse than recapitalizing the banks by recapitalizing the banks (through receivership), but many people smarter than me (like krugman) think it is….
March 24th, 2009 at 2:21 pm
And how is this robbery if there’s nothing to rob? Krugman, et al, deeply believe the banks are insolvent and there’s no way to turn a profit from their assets. That’s why they constantly polemicize on the necessity of nationalization. But if they’re right, the taxpayer is going lose massive amounts of money no matter what we do. If the assets are as bad as Krugman insists they are, it’s totally dishonest to pin taxpayer losses under this plan on the plan itself.
There are plenty of reasonable criticisms of the Geithner plan, but Krugman is a joke.
March 24th, 2009 at 2:21 pm
I doubt that Krugman feels excluded, and doubt that he has been entirely. Same for Stiglitz. jesse’s suggestion above that their views are based on spite somehow is utterly comical.
March 24th, 2009 at 2:21 pm
WHS — you may be right. But it’s not like Geithner’s putting in his own money. It’s more like you go to me and say, “I’ve got to make an investment on behalf of a whole bunch of people, and….” You might do that if you expected a win-win, so long as you thought it was important to funnel money to me instead of keeping it for your investors. And it seems possible that Geithner may think it’s important to funnel a bunch of money to banks and Wall Street so we can return to the status quo ante.
March 24th, 2009 at 2:21 pm
My comment #9 was a response to comment #4.
March 24th, 2009 at 2:23 pm
Like most people, I have no expertise and so can’t really assess the arguments on the merits. But I find it annoying to see Matt and then Jesse (whoever s/he is) pretending they can read minds — how can anyone know whether Krugman and Stiglitz are being so vehement because they’ve been shut out of the process? I don’t know about Stiglitz (haven’t read his piece yet) but Krugman has made no secret of the fact that he’s very worried and upset about the way the administration is deailg with the dire situation we’re in. You can argue that he’s right or that he’s wrong — but don’t make him into a crank.
The Obama administration is indeed behaving like most mainstream “liberals” — which is disappointing, and may well turn out to be disastrous (if Krugman’s economic argument is correct).
March 24th, 2009 at 2:24 pm
It’s a bet that looks fair if …(b) you think the social gains from creating recapitalized banks exceed the fiscal cost to the taxpayers of suffering through lose-lose.
Well, of course healing the banking system is the critical goal here — not making money for taxpayers. And yes, of course any method chosen to do this is going to cost the taxpayers a lot of money. I think efficacy (and, unfortunately, political feasibility) have to be the deciding factors.
Again, if you want Krugman-approved Swedish-style plan, good luck to you. But don’t kid yourself such a plan is going to be cheap. The banking system needs a certain amount of new capital. That amount is almost certainly in excess of $1 trilion — no matter which method is employed.
but the administration has quite obviously decided that it isn’t going to go down that path
Yes and no. Full scale, Swedish-style nationalization from the getgo, no. But if they can get this new legislation (the power to seize shadow banks) passed, and the Geithner plan manages to accurately reveal to us how much additional capital is needed after private investors have shot their load, we’ll actually be in a pretty good position — far better than now I’d argue — to “complete” the recapitalization process via a cheaper, mini-nationalization. In other words, if the Geithner plan injects, say, a trillion dollars into the banking system, and it becomes clear that the real cost of recapitalization is, say, $1.4 trillion, then we’ll “only” be $400 billion from the endpoint once the Geithner plan has run its course. And I would guess that at that point, the final, additional required capital injections from taxpayers would likely not make Uncle Sam a majority equity holder in the banks. Whether that’s good or bad is a matter of opinion; but politically it sounds a lot easier.
March 24th, 2009 at 2:25 pm
“if not, we’ve recapitalized the banks by overpaying. i’m still not sure why that’s supposed to be so dramatically worse than recapitalizing the banks by recapitalizing the banks (through receivership), but many people smarter than me (like krugman) think it is….”
That’s the thing. It’s not dramatically worse in terms of expense. It could be slightly worse, it could be somewhat cheaper.
Like Matt has pointed out, it lessens our opportunity to fiddle with the inner workings of banks, and that’s a solid criticism. But that’s not what Krugman and Stiglitz keep harping on. It’s very difficult to not come away with the impression that they’re just pissy that we aren’t using their preferred solution.
March 24th, 2009 at 2:28 pm
if not, we’ve recapitalized the banks by overpaying. i’m still not sure why that’s supposed to be so dramatically worse than recapitalizing the banks by recapitalizing the banks (through receivership)…
I’m not sure about this either. One method uses overpayment for assets to convey the necessary taxpayer dollars to insolvent banks. The other method uses overpayment for equity to convey the necessary dollars to insolvent banks.
March 24th, 2009 at 2:28 pm
“You might do that if you expected a win-win, so long as you thought it was important to funnel money to me instead of keeping it for your investors. And it seems possible that Geithner may think it’s important to funnel a bunch of money to banks and Wall Street so we can return to the status quo ante.”
Sure, it leaves that possibility open. But if I offer you massive returns for a small up-front fee, that as much like a Nigerian Prince scam as a giveaway. And yet so many people are absolutely certain that it proves Geithner wants a giveaway. It’s a bizarre reading of the situation rooted in preconceived biases.
March 24th, 2009 at 2:30 pm
http://zerohedge.blogspot.com/2009/03/ridiculous-marks-of-toxic-assets.html
Hence, if there’s no robbery, then there’s no solution. Losses are losses, and someone’s gonna have to take them.
March 24th, 2009 at 2:33 pm
Like Matt has pointed out, it lessens our opportunity to fiddle with the inner workings of banks, and that’s a solid criticism.
Well, it’s a less solid criticism now that the administration has introduced legislation allowing them to “fiddle with” the non depositary actors. In fact, if the legislation authorizes not only new powers, but enables said new powers with money, then we might as well call this “the money-center bank nationalization act.” And that, frankly, is what needs to be done at any rate for the Krugman/Stiglitz approach to be carried out. I mean, you could almost say that Obama and Geither are doing what Krugman wants them to. They’re just not proceeding in a particularly dramatic fashion, and they’re attempting to whittle down the size of the problem a bit while the new legal framework is discussed and voted upon.
March 24th, 2009 at 2:33 pm
Option (B) only makes sense if you think that this is the best (cheapest and/or fastest) way to recapitalize the banks. With the Geithner plan, if the assets turn out to be crap (which I think is the case), then the private investors take a hit, the tax payers take a huge hit, and the people holding the bonds and shares of the banks make out OK because the toxic stuff has been offloaded already. With nationalization, the shareholders get wiped, the bondholders probably take a haircut, and then the taxpayers are on the hook for the remainder.
March 24th, 2009 at 2:36 pm
Since the private investors are in the first loss positions Matt leaves out one other outcome. The private investors lose everything they put in and the government manages to fix the banking system with a small loss or at breakeven.
Life is not an either/or process. The only two outcomes are not the government makes a lot of money or the government loses a lot of money.
March 24th, 2009 at 2:38 pm
It’s not robbery; it’s a fee for a service. Whatever the subsidy is worth, that’s what we’re paying the finance firms for something we get in return: information we can all agree to pretend to believe regarding the value of toxic assets.
March 24th, 2009 at 2:39 pm
I love it! Stiglitz and Krugman, who again and again have proven their mettle and concern for the public interest, are wrong and “unfair” but weasels like Geithner – who force members of Congress to change bonus language at the behest of Wall Street – are to be treated with kid gloves.
Pathetic. Live in the real world.
March 24th, 2009 at 2:41 pm
jasper, i agree with your response to my comment, and i also think that your comment 18 is relevant here as well. in short, we shall see.
daveNYC, the equity holders have already lost a pile: there’s not much equity left to lose in citigroup. the bondholders, though, are part of the problem: many of those bondholders are said to be sovereign wealth funds and other foreign investors whose support for US long paper is critical to fund whatever form of bailout we use.
a big haircut on those bondholders might well trigger the law of unintended consequences and stifle the recovery before it starts through higher interest rates.
i don’t doubt this risk has played a role in treasury’s thinking.
March 24th, 2009 at 2:43 pm
@bdbd/Mary
I’m not sure about Krugman’s motives (although he has never seemed particularly sympathetic to Obama and his team), but the source of Stiglitz’s ferocity is a no-brainer: he and Larry Summers hate one another, and have a rivalry that dates back at least a decade to when Summers was at Treasury and Stiglitz was at the World Bank. To pretend that doesn’t inform Stiglitz’s criticism, or imbue it with extra ferocity (and, I’d say, hyperbole) is entirely unrealistic.
March 24th, 2009 at 2:43 pm
“a bet that looks fair if (a) you think the win-win scenario is much more likely than lose-lose, or (b) you think the social gains from creating recapitalized banks exceed the fiscal cost to the taxpayers of suffering through lose-lose. Option (a) seems like wishful thinking, but option (b) is perfectly reasonable. ”
Not really. If you think the social gains from creating recapitalised banks exceed the fiscal cost to taxpayers, then you’d buy the assets at their current carrying value, freeing up the capital held against them. As it is, except in a few cases the banks will still have to take write downs if they sell the assets. So they’ll just need more capital through the back door, while the govenrment gives up half of any upside on the assets. The structure of this programme is all about taking a lot of exposure while putting as little government cash in upfront as possible. It has nothing to do with creating the most efficient, just or otherwise desirable solution.
March 24th, 2009 at 2:44 pm
if not, we’ve recapitalized the banks by overpaying. i’m still not sure why that’s supposed to be so dramatically worse than recapitalizing the banks by recapitalizing the banks (through receivership), but many people smarter than me (like krugman) think it is….
Well, other than the fact that you’re leaving the same nimrods in charge who managed to blow the original capitalization. And who have already said they’re not going to use that additional capitalization to do anything as pedestrian as lending to ordinary people. And who will do their damndest to make sure that nobody takes the slightest haircut.
And the fact that Obama will have to get up and say “We actually planned this outcome, even though the taxpayers got boned. We just thought we should keep it from you for your own good.”
March 24th, 2009 at 2:51 pm
Meanwhile, I actually think the most distressing thing about the criticism from folks like Krugman and Stiglitz is what you can infer reading between the lines from how ferocious it is.
They would argue like that even if it was about choosing toppings on a pizza, so it’s not a big deal. They are rhetorically very talented.
People should be angry b/c as Elizabeth Warren says the financier class has us in a hostage situtation. Bail us out or you get Great Depression II.
The coldly analytical, smart move is to avoid Great Depression II first and then go after the financier class. Try both and you might bungle it.
If Obama’s budget was more centristy I’d be more inclined to agree with those who are absolutely convinced beyond a doubt that Summers and Geithner are the spawn of the devil. Instead you have David Brooks arguing it’s – the budget is – the worst of old-timey big government liberalism and that moderates were sold out.
March 24th, 2009 at 2:56 pm
That should be:
… while responding to criticism from the left by putting its fingers in each others’ asses.
March 24th, 2009 at 3:00 pm
Isn’t there still a lose-win option. The investment is not in the assets as a whole, but in particular assets. Suppose the assets as a whole turn out to be worth exactly what people pay for them with half being worthless and the other half making an equal profit. Wouldn’t the government be on the hook for most of the loss while getting only half of the profit? Or isn’t that how the system works?
March 24th, 2009 at 3:00 pm
I’ve heard Obama say smart things about the importance of avoiding groupthink. Maybe in foreign policy, he’s open to a broad range of thinking. But, on economics, he’s chosen as advisors a narrow range of neo-liberals — Austan Goolsbee, Larry Summers, Christina Romer, who are preternatually likely to accept Geithner’s pro-plutocratic proposals.
Economists are trained to take a god’s eye view of the economy and of social welfare, and to be effective, they really ought to the voice against the working of vested interest, and for policy guided by abstract principle.
Obama has chosen economic pragmatists, of a single, narrow stripe. It’s going to be a problem, as the center-left coalition of the Democratic Party tries to work out a modus operandi on economic policy, and most components of that coalition find no allies among the Obama economics inner-circle.
March 24th, 2009 at 3:01 pm
(1) “The Obama administration seems to respond to criticism from the right by turning the other cheek and becoming more solicitous, while responding to criticism from the left by putting its fingers in its ears.”
(2) “Obama doesn’t need to persuade Krugman or Stiglitz to get anything done. He does need to persuade either some Republicans or some of the douchebag Democrats who don’t realize they won the 2008 election.”
#2 explains #1 better than does a mere invocation of “silly, they’re Democrats”. The issue, of course, is that when GOoPers win elections they maintain party discipline (except where necessary to make a show of being “moderate” and only then in such cases where the GOoPer agenda is still not effectively challenged, c.f. Specter, Arlen) — so there is no need for a GOoPer president to move to the left to make sure “moderate” GOoPers are on board.
March 24th, 2009 at 3:02 pm
“The Obama administration seems to respond to criticism from the right by turning the other cheek and becoming more solicitous, while responding to criticism from the left by putting its fingers in its ears.”
Has to be expected. This is the modern Democrat M.O. Clinton made his bones pulling similar stunts.
March 24th, 2009 at 3:05 pm
TJ, i realize that fashionable cynicism is a lot of fun and all, but that doesn’t make it completely accurate.
let’s, for example, take citigroup, obviously the bank in worst shape and the poster child for receivership.
citigroup got in trouble under chuck prince. he’s no longer running the company; vikram pandit is.
now pandit may or may not be the best guy to run citi, and they certainly overpaid for pandit’s hedge fund in the first place, but the idea that we should have to go down all the difficulties of receivership (such as getting it through the senate) just to replace pandit? who didn’t create the problem?
as for making loans: let’s be blunt about this, because again, i can appreciate the joy of angry cynicism.
the banks made too many loans to too many questionable credits in recent years. the idea that banks have stricter standards in place now, making loans harder to get, is a good thing: i do not favor putting funds in the bank’s hands just for them to hand out bad loans with.
as for your last comment, whatever in the world are you talking about? the losses are going to be socialized whatever route it takes: the taxpayer is going to pay the price. there is nothing secret about this. you’re discussing it right here in public.
March 24th, 2009 at 3:07 pm
the coldly analytical, smart move is to avoid Great Depression II first and then go after the financier class. Try both and you might bungle it. – Peter K
I’m paranoid enough to agree with Dr. Warren’s analysis here (she’s usually right, anyway), but not this recommendation. If the mob is selling you “insurance”, you don’t pay the insurance regularly to avoid anything “happening” and then call the police after the mob is averted … you get the insurance “salesman” out of the way and you call the police ASAP before the situation escalates.
Because what’s to stop the mob from, once you have paid up and they can’t get anymore out of you, from destroying your place of business anyway?
*
My $0.02 as a non-economist: why should the government be operating under a “we’ll assume the risk” paradigm? If the government is gonna pay for it, why doesn’t the government just buy the toxic assets outright and then distribute shares to the American people (in case some are less toxic than currently thought) or at least sell them (at a loss) to people who can pay (without borrowing money to do so).
March 24th, 2009 at 3:08 pm
peter k, you remind me: my solution to the hostage dilemma is a white collar crime special task force in the justice department.
there is no doubt in my mind that there was a criminal conspriacy at AIG to commit fraud and fraudulent conveyance: they were selling polices that they couldn’t possibly pay off.
there is a reasonable expectation in my mind that serious investigation would turn up many examples of warnings being ignored and willful refusal to hear risk factors explored at length which couuld conceivably fall into the category of fraud.
i’d love to see all the “financiers” sweating that they might actually have to go to jail: that’s the parallel action with avoiding Great Depression II.
March 24th, 2009 at 3:09 pm
Isn’t there still a lose-win option. The investment is not in the assets as a whole, but in particular assets. Suppose the assets as a whole turn out to be worth exactly what people pay for them with half being worthless and the other half making an equal profit. Wouldn’t the government be on the hook for most of the loss while getting only half of the profit? Or isn’t that how the system works?
Good point. The way it looks, with the win/loss ratio, for the government to come out ahead almost all those securities have to come out to be winners.
March 24th, 2009 at 3:10 pm
DAS, for what it’s worth, prof delong has been suggesting that the government buy up every mortgage out there….
March 24th, 2009 at 3:10 pm
The problem with this entire discussion is the quaint notion that these banks are merely having a “capitalization” problem. They’re not.
They’re having a solvency problem.
These banks have trillions of dollars in combined bad debt — debt based on assets whose worth is nearly impossible to adequately assess. So all the Geithner plan (better called the “Bush Plan, Part 3″) will do is plug a few holes in a dam that’s already been blown to bits and floated half way down the river.
I know. I work for a bank. Trust me on this.
The thing is, until Geithner, Obama, and many others stop thinking that a pile of garbage is, in fact, a pile of gold bullion, all we’ll do is throw money at the problem instead of actually curing it.
The cure is much more painful than they want to admit and, sadly, simply masking the symptoms (which is all the Geithner plan does) won’t make the underlying disease go away.
March 24th, 2009 at 3:12 pm
It’s a bit more subtle than that. The government is guaranteeing private investors against downside risks but has secured for itself a fair share of the upside.
Hey Matt, give me 100K to bet that the Memphis Grizzlies will be the next NBA Finals winners. I’ll add $1 and we’ll share the profits 50/50, OK? So you’ll have a fair share of the upside!
And no, Krugman and Stiglitz are not angry that they didn’t get a comfy job in DC: they both admitted they were not fit for government positions. Unlike, say, Summers or Obama, they would rather speak their mind than become whores of the financial sector.
March 24th, 2009 at 3:13 pm
Mark D, if the worth of the assets is impossible to adequately assess, then it’s impossible to say there is a solvency problem as such.
but, in fact, there is a solvency problem as such: recapitalizing the banks defines the problem as solvency and not liquidity. the geithner plan takes a backdoor approach to that recapitalization, and it may indeed not be enough, but that problem is true of receivership, too: the amount necessary to recapitalize the banks is the same under both approaches….
March 24th, 2009 at 3:14 pm
Shorter DAS:
Republicans sacrifice the good of the country in favor of party unity;
Democrats sacrifice party unity in favor of, um, what exactly?
March 24th, 2009 at 3:14 pm
If the mob is selling you “insurance”, you don’t pay the insurance regularly to avoid anything “happening” and then call the police after the mob is averted … you get the insurance “salesman” out of the way and you call the police ASAP before the situation escalates.
I don’t think this is a good analogy. Maybe if the heavies are at your business and demanding protection payment, you pay them and avoid your legs getting broken. Then you call the police after they leave.
March 24th, 2009 at 3:15 pm
I don’t pretend to fully understand the financial intricacies, but this sounds a lot like the Resolution Trust Corporation from the S&L meltdown. Are we going to have to bend over for one of these things every twenty years?
March 24th, 2009 at 3:17 pm
Mark D. brings up a good point, although I would argue there is a capitalization problem … but the banks “solved” that by selling mortgage backed securities leaving workers saving for retirement holding the bag (the bailout should have started by the feds purchasing these investments, IMHO).
And why do banks have so much bad debt? Because people bought more home than they could afford, as everyone says? If so, then a bunch of foreclosures would offset this. The problem is that housing itself had become (and still is, in fact … we haven’t seen the worst yet) ridiculously expensive. As long as someone would be willing to buy housing for more than it last sold for, the bank assets were ok. But now that people realize they can’t afford to buy housing, the market has collapsed … the Ponzi scheme is caput. And the banks have been left holding the bag (as have people with mortgages).
Something must be done so that housing prices can have a soft landing to values at which people can afford to buy housing again. I don’t quite know what that is … but presumably the best economic minds out there might have an idea or two.
March 24th, 2009 at 3:18 pm
DTM, the strength of the blogospher is vigorous, open discussion.
the weakness is instant expertise.
and when it comes to discussing the banks, there’s a load of instant expertise in the room.
i have a background in economics, i have been following markets for 25 years, and i pass the dean baker test: i predicted a disaster in housing and a resulting problem for the economy years ago.
and yet i don’t really think i know enough to be sure about any of this, especially given that none of us has actually seen the so-called “toxic assets.” (indeed, my assumption is that some of the assets are worth zero, some are worth par, and the rest are worth somewhere in between.)
when you add on the complexity of understanding the problem the complexity of the geithner plan (in terms of multiple moving parts), instant expertise is stretched beyond its limits in my estimation.
March 24th, 2009 at 3:20 pm
Interesting view…So what does that make Fannie and Freddie?
I’d imagine that Stiglitz was just as exorcised about the implicit guarantees that came from the GSEs as Krugman was.
March 24th, 2009 at 3:20 pm
DAS, the “economic” solution to the problem you are citing is called “mild inflation,” and it looks like bernanke is open to that….
just to be clear: what “mild inflation” would allow is nominal prices to appear to stabilize and even increase even though real prices are falling. this will bring house values and mortgage values into closer alignment….
March 24th, 2009 at 3:22 pm
[They] have a rivalry that dates back at least a decade to when Summers was at Treasury and Stiglitz was at the World Bank. To pretend that doesn’t inform Stiglitz’s criticism, or imbue it with extra ferocity (and, I’d say, hyperbole) is entirely unrealistic. – jesse
And what exactly happened between Stiglitz and Summers that started this rivalry? Could it have been that Stiglitz finally realized the depravity of the neo-liberal prescriptions the World Bank and IMF reflexively offered to (3rd World) countries on the skids … prescriptions that were the exact opposite of how economically successful countries had historically managed to become successful?
And who is offering which sort of prescription now? When Summers and Geithner were first tapped, there was a lot of talk about how those two have learned their lessons. I’m not so sure they’ve learned anything …
March 24th, 2009 at 3:24 pm
just to be clear: what “mild inflation” would allow is nominal prices to appear to stabilize and even increase even though real prices are falling. this will bring house values and mortgage values into closer alignment…. – howard
I would agree that mild inflation at this point is a good idea. We shouldn’t worry about “oh noes, if we inject too much money into the economy, they’ll be inflation” … especially when the specter of a deflationary spiral looms.
But “mild inflation” will only work if wages keep up with said inflation. If they do not, then housing still will be unaffordable, and the markets still will have not reached bottom.
March 24th, 2009 at 3:25 pm
now pandit may or may not be the best guy to run citi, and they certainly overpaid for pandit’s hedge fund in the first place, but the idea that we should have to go down all the difficulties of receivership (such as getting it through the senate) just to replace pandit? who didn’t create the problem?
Who cares about Pandit? It’s the next two levels down I’d be worried about.
the banks made too many loans to too many questionable credits in recent years. the idea that banks have stricter standards in place now, making loans harder to get, is a good thing: i do not favor putting funds in the bank’s hands just for them to hand out bad loans with.
I would agree with you. However, I’m not the one justifying this plan by saying credit has to get flowing again to save the economy. If that’s not in the cards, then yeah, I think reorganization and finding out who the capital is actually committed to would be more efficient. If they’re all foreign banks and hedge funds we can’t screw with it would be nice to know that.
as for your last comment, whatever in the world are you talking about? the losses are going to be socialized whatever route it takes: the taxpayer is going to pay the price. there is nothing secret about this. you’re discussing it right here in public.
You think the actual taxpayers agree to this? Not the ones I talk to.
March 24th, 2009 at 3:37 pm
Krugman and Steiglitz are right to be apoplectic. This is the appropriate emotion for someone in their position with the belief that the entire system is corrupted.
They are the heroes acting for what they believe is right. Obama is the coward taking the easy road; the corporatist DLC approach.
Instead of blindly following Obama down the supply-side Republican crony-capitalist path–Democrats better start evaluating whom they really serve.
Because right now all but the most partisan Obama followers can see that the Democratic party is broken and is owned by Wall Street. Obama is a spending all his political capital on a giveaway to the bankers. It’s disgusting and if you’re not mad you’re part of the problem.
March 24th, 2009 at 3:38 pm
but the idea that we should have to go down all the difficulties of receivership (such as getting it through the senate)
And I’m curious, why would we have to get this thru the Senate? A real team of bank auditors probably sends them into instant bankruptcy, no government action required whatsoever. Receivership would be doing them a favor.
March 24th, 2009 at 3:43 pm
Everything Krugman writes is toned in such a way that it subtly but clearly suggests “the Obama people” act for the most part in bad faith, at least by Krugman’s lights. I wouldn’t expect an administration to be terribly receptive to such a person, regardless of credentials, and futhermore, I ge the feeling Krugman is just fine with things being that way. I’m not sure how he would in fact respond to a request to formally advise the administration. And in any case, his advice appears distilled twice a week for them to take under consideration as they see fit. I think he doesn’t hold out much hope to see his preferred policies enacted, but there is really little chance that the Obama people don’t pay close attention to waht he writes. But since they obviosly have significant differences, the fact that they are not regularly on the phone (but then, we atually don’t know that’s a fact, do we?) doesn’t really mean all that much.
March 24th, 2009 at 3:57 pm
@ Howard: The shareholders equity can still go down to zero. Right now it’s looking like their positions will rebound a bit, and anyone who got in when C was in the $2 range will make out big. I agree that the bondholder situation is tricky, but the problem is we aren’t arguing about a 50% vs. a 10% haircut, we’re talking about no haircut at all.
March 24th, 2009 at 4:13 pm
Who has the better record of prediction, including false alarms?
Krugman, Roubini, and Stiglitz?
Or Summers, Bernanke and Geithner?
My ratings would would be:
AAA-Stiglitz
AA-Krugman (called oil price bubble wrong, did not understand reasons for delay in crisis, but Stiglitz did)
A-Roubini (some false alarms -false negatives carry heavy penalty in my book)
…
BB-Geithner (saw regulatory failure)
…
unratable faiure
Bernanke
Summers
So, who would you believe?
March 24th, 2009 at 4:21 pm
Everything Krugman writes is toned in such a way that it subtly but clearly suggests “the Obama people” act for the most part in bad faith, at least by Krugman’s lights.
I like Krugman and he’s brilliant but during the primary he was very unfair to Obama. He could be right about how this plays out, though. I think it’s about even money.
The question is that if it does turn around will the critics admit their error? They’ll probably change the subject.
March 24th, 2009 at 4:34 pm
If you want to know who to believe, you should note that Ben and Timmy are lieing about AIG.
They say they didn’t have authority to take over AIG, but that is false.
AIGFP was regulated by OTS, which is part of Treasury. OTS could handle AIGFP like the FDIC handles a bank. They have recourse to Treasury and FRB financing, so they could have shut down AIGFP.
March 24th, 2009 at 4:58 pm
Yes and no.
Yes, if no one knows what the assets are worth, than the banks could just claim they’re worth what the hell ever and be done with it. Which is the reason they want mark-to-market killed — that way, they can just claim the assets are worth billions because … well, because they plan on holding the assets for ever and ever and ever and … well, they said so!
But no — the problem is that the assets’ true value has been a scam for years, with banks and ratings agencies and the like just making up the numbers on the fly. Read this post over at HuffPost (it does a better job of summing things up) and you’ll see that no one has any clue of the underlying part of these derivatives because those parts have been sliced, diced and sold to an extent that no one can actually find them.
IMHO, a better plan would be to focus first on tracking down those subprime mortgages packaged into derivatives, shred any and all that are the result of abuse (which Fitch estimates is around 80% of all nonprime mortgages), and restructure them (with the government pitching in a bit for the interest loss, as a bone to the banks) to help truly establish the value of the derivatives.
Then, and only then, should they institute this plan — that way, they’d have a better idea of the assets’ worth while also ensuring they are less risky.
Granted, my plan ain’t new by any stretch, and would be a gigantic pain in the ass politically. But it would:
1. Stabilize the risk of the assets.
2. Get an idea of their actual worth.
3. Wind up costing less since the government would probably only need to pitch in a portion through the restructuring, rather than hundreds of billions on assets with unknown values and setting up the possibility of trillions in losses.
4. Allow millions of people to keep their homes.
Again, not a new idea. But, IMHO, from following all this since right after Gramm’s amendment killed Glass-Segal in 1999 up until now, it really should be the starting point, rather than what seems to be an after thought.
Anyway, not sure I can see the responses, but feel free to shred away, folks, since I’m sure it’s a stoopid idea.
March 24th, 2009 at 5:02 pm
I like Krugman and he’s brilliant but during the primary he was very unfair to Obama – Peter K.
That’s how I felt too. But given the direction Obama is going, Krugman may have been correct about Obama. Even if Krugman was being unfair, and Obama is shutting Krugman and Stiglitz out due to some personal pique, doesn’t that indicate Obama is being just as immature and irrational as Krugman and Stiglitz are accused of being?
OTOH, would HR Clinton have been any better than Obama in regards to all of this? To adapt a now famous phrase, you go to the elections with the Presidential Candidates (and the media who tries to play king/queen-maker here: remember when Larry Agran had more of a chance at being Pres. than Bill Clinton? of course you don’t … because the media decided it didn’t want Agran as President whilst it loved — well, loved to hate — Clinton, so the media and Dems made sure Agran was completely shut out and ignored until he became a nobody) you have … not with the ones you wished you had.
March 24th, 2009 at 5:58 pm
William Greider, in the March 30, 2009, Nation, describes how in the Third World debt crisis of the 80’s Paul Volcker allowed the banks forbearance and a “lengthy, methodical workout”. It is pointed out that this has been done many times in the past.
In principle the raw earnings power the big banks are claiming recently could be used to do this again. But it seems that Krugman, the NYT Editorial page, and other nationalization advocates have a bug in their ass that shareholders in these banks will be let off the hook. This time, they have to be “wiped out”.
March 24th, 2009 at 6:18 pm
They are ferocious because both economists were deeply involved in the Asian crisis of 98. And both saw what happened when a country opted for soft resource constraints, connecting unprofitable and rent seeking banks to the public treasury. Indonesia still hasn’t recovered. And they saw what happened in the Soviet union, when gangster like figures used the state to commit fraud on a massive scale.
The U.S. has its peculiarities. Unlike the Soviet Union, there is, on the surface at least, two parties. One, the Republicans, are hollowed out, and have become a regional party much like some Russian nationalist grouping – racist and idiotic, in which incredible beliefs are cultivated in order for agents, operating behind the moron shield, to exert a certain amount of blackmail power. At one time, conservatives might even have offered a robust and useful critique of the Paulson-Geithner plan, but that time is long past, and instead, in backward peapatches where the unemployment has skyrocketed, they spend time fighting against “big government” whilst relying on government to bribe foreign industries to come to their desolate little holes. It is like some fantastic story by Flannery O’Connor.
So the protest over this comes from the ‘left’, which uses such radical tools as arithmetic. The numbers add up as in one of those botched Bush programs, in which the looming future is wished away and attention is distracted by multiple ad hominem attacks.
On the one hand, the cornpone crazies, on the other hand, the shark class of peculators. In between, a nation that has never seen unemployment this bad, at least for a generation, and doesn’t fully believe it.
The boogyman of what is “politically do-able’ is, of course, horseshit. Politically, the AIG clawback was wildly popular – but somehow, much to the establishment’s relief, it is going nowhere. TARP, on the other hand, was never ever anything but a very very minority preference – and it came in toute suite. Why? Cause the politics here is not about opinion among the populace, it is very much opinion in the village and in the country club circuit. That is all it is. Admitting Citi is bankrupt, which is what “nationalisation’ amounts to, would actually be the much more popular ploy – ask the question, should the U.S. subsidize big bankrupt banks, and see what answer you get back. But, as in the establishment rush to invade Iraq, liberal public opinionmakers are encouraged to tell ghost stories to the tribe at every turn – a political wilderness awaits the person who utters the word nationalization! Meaning, the ties that top Dem pols have with the investor community would be disturbed if we don’t play along with their fantasies.
One of those fantasies is that numbers themselves are simply what you want them to be. That Obama, only four months into office, is proposing to utterly corrupt the FDIC is a litmus test of what is “politically” possible – for anything is possible for the kleptocratic class. This is Yeltsin’s Russia, except we can protest that the numbers don’t make sense all we want. Meanwhile, the kleptocrats piss on that equal justice for all crap. And wipe their ass on what used to be a sort of democracy.
March 24th, 2009 at 6:57 pm
I agree with roger — the distinguishing feature of a con game is fucking voodoo bullshit like we’ve seen with the bailout.
And contrary to what some Wall Street buttkissers have argued here, there is no good argument I’ve seen for why the US Government has tried to rescue a few big banks, rather than simply replacing them by extending government credit via the many healthy banks out there who are not run by kleptocrats.
Obama can blow us off with bullshit for the moment — but
In about 15 months, the Democratic Party will have to explain to the voters where $10 TRILLION of their money went –and why.
This country really needs a new third party.
March 24th, 2009 at 7:55 pm
TJ: if the purpose of receivership is to fire the citigroup risk manager, then i would suggest that is far too blunt an instrument.
the reason that congress would have to get involved in receivership is that receivership costs money! more money than is currently available under any approved program! people keep confusing a typical depository bank (the 3-6-3 variety: pay 3% for deposits, lend them out at 10x leverage for 6%, and hit the links by 3) with the likes of citigroup.
in a typical deposit bank, when the FDIC takes over, it uses the insurance fund to make the depositors whole and then finds an existing bank to take over all the plain vanilla stuff that the bank was doing.
that’s not citigroup, which is so much more than a typical deposit bank as to not even be worth discussing in the same breath.
as i’ve said endless times since this whole deal started, we can recapitalize the banks directly through receivership or indirectly through buying the assets in an overpriced way, but there’s no escaping recapitalizing (unless you are don williams, who seems to be willing to roll the dice that you could tell citi and the other big 3 to go fuck themselves without it causing a cascading domino problem. there isn’t a single elected political official in america who would go down that path, for good reason, and even in don’s scenario, we still have to spend trillions to replace the capacity of those banks).
Mark D, i don’t think it’s a stupid idea, i think it’s an unachievable idea. i don’t have any clue how you “track down” how the underlying assets were packaged and sold.
davenyc, citigroup closed today at $3.01. that’s not much equity to wipe out is my point; obviously there are some new buyers at $3.01 who are hoping to benefit, but most holders of citi stock have already lost 80 – 90% of their equity stake. as for the bondholders, if we’re not going to wipe out the bondholders, i don’t understand how receivership would work. are you proposing that as part of the takeover, the government says “par” is no longer “par?” or are you saying that the government says that the “coupon” is now being reduced? or what?
al, what can we say: an actual lucid comment from you, so let me answer the AIG matter.
AIG was selling insurance products that it could not pay off on. there are only two explanations that fly wrt that: one is that internal controls were so lax that they had no idea they were doing it (i would be theoretically prepared to accept that were it not that so many people, including, as we now know, goldman, were so unsure of AIG’s ability to deliver that they hedged their exposure to AIG’s ability to pay).
the other is they did know they were doing it and felt like the circumstances under which they couldn’t meet their obligations couldn’t happen (supporting this possibility is that outside auditors were excluded from reviewing the books in the London division that was selling this drek).
in the second case, you’ve got a situation where people are selling something they know they can’t back up (fraud) and are taking money in return for a policy they hand over that they can’t back up (fraudulent conveyance).
maybe they’ve got a defense against that, but i’d sure like to see them forced to make it….
March 24th, 2009 at 8:15 pm
Howard, there is no need for the receivership to cost money unless you make good the counterparties. But guess what? That isn’t part of the law. Citi forced the change of the Glass Seagell law, now let it skewer them. Neither FDIC nor the Guv is under any obligation to do anything for anybody over 250,000 dollars. That is that.
I know – all the world will melt! But really, just a bunch of rich people will get a little poorer, and various moneyfunds and pensions will have to ask – directly – for help from D.C. Good. Sorting through the wounded is what bankruptcy is all about.
March 24th, 2009 at 10:18 pm
WIN-LOSE
OK, suppose each asset is worth 50 or 150 with probability 1/2.
Suppose 1 overpay 120 for each asset with 85% non-recourse loan (i.e. I put in $18 per asset). What’s to stop me from having 100 separate portfolios with 1 asset each, where I lose $18 on about 50 of them but gain $30 on 50 of them?
Banks: win $20 per asset
Investors: win $6 per asset
Government lenders: lose $26 per asset.
Sure, it won’t be as simple as this but why can’t the government lose a whole lot while investors in aggregate and even individually (if they can somehow diversify) win a whole lot?
March 24th, 2009 at 11:56 pm
Even if Krugman was being unfair, and Obama is shutting Krugman and Stiglitz out due to some personal pique, doesn’t that indicate Obama is being just as immature and irrational as Krugman and Stiglitz are accused of being?
It would be but i don’t think it’s happening. I have no intuition about Stiglitz, but somehow I just don’t buy that Paul Krugman is persistently trying to get barack Obama or Larry Summers on the phone and they’re not taking his calls. From the way he writes, i think he has something rather close to contempt for them and much prefers to be on the outside pissing in. Which as a member of the fourth estate and a public intellectual is precisely his job, so I’m in no way lodging a criticism of him. I think the worst that is likely is that the Obama people aren’t calling him either, but i don’t think that amounts to shutting him out, especially when his views are available publicly twice a week. And everyone involves knows he would advise something they’re apparently not predisposed to, so it would be a short conversation. Also, i don’t get the sense that Krugman likes doing the one thing you have to be able to do if you’re going to directly advise the government: explain your position patiently as many times as it takes to as many people that will listen, with no hint of impatience. Krugman sounds like an impatient teacher even when he’s talking to laypeople on TV. i don’t think he wants to try to argue patiently for policies he sees as painfully obvious to people he thinks should know better. So he puts it in the newspaper and people can take it or leave it or call him with questions.
Bottom line, Matt has no more real basis for saying he or Stiglitz is being shut out than I do for saying maybe they aren’t. It’s all hunches.
March 25th, 2009 at 12:43 am
It’s not all that complicated, folks. In any business, if a would-be advisor, however smart and however good his or her previous track record, is known for pouring verbal acid on you if you tune out their advice, then it’s a waste of time to solicit that advice in the first place, because you know it will not be motivated by concern for your program or job tenure — it will be motivated first by the desire for affirmation of their wisdom. In politics, this tendency is even more intense, because the history of politics everywhere is replete with advisors who turned on their patrons once it became noticeable that their advice is not winning the day. That’s why trust is the gold standard for human relations in politics, and why it’s natural for politicians to listen less closely to those who sound off if they don’t carry the day.
March 25th, 2009 at 3:13 am
DTM, Thanks, that lays it out admirably clearly.
Basically, your contention is that the expected value of losses over 15% is low enough as to be covered by a risk premium. In your example, it shows up as a 25% risk of a $5 loss which works out to a reasonable $1.67.
Once one accepts this, everything else falls into place. But this raises the obvious question: if the numbers are all so reasonable, why isn’t this already happening on a much smaller scale before government involvement? There must be some part of the math which wouldn’t work without the government.
The most above-board explanation would be that the government can offer much much better interest rates, especially at a time of wide credit spreads. If a compelling case can’t be made that lack of credit on acceptable terms is all that is keeping the market for these loans/securities frozen, then that explains the need for the scheme, without assuming vast subsidies. Failing that, one would have to assume that the government will be lowballing the risk premiums, isn’t it?
March 25th, 2009 at 5:01 am
Tibunus:
Couldn’t-a said it better myself.
March 25th, 2009 at 9:16 am
As a person of significantly less public stature than Stiglitz or Krugman it has seem clear to me since before the election had been decided that Obama would go down the Bush-lite or Clinton without a difference road. For those people, public or otherwise, that believe that this would be the road to ruin, disappointment in the outcome has be the rule. When Matt or others complain that Stiglitz and Krugman should just be happy because it might work out I would suggest they miss the reason for the ire.
The central problem for many opponents, is that even if this plan works, which is highly unlikely in my opinion, the people that wiped out the economy and put the proceeds in their pockets make even more obscene amounts of money. The taxpayer is simply left with the bills. This plan along with (surprise!) currently proposed reductions in health, education and other safety net programs will lead to an even more massive redistribution of wealth. The plan will not re-inflate the economy because most Americans cannot go farther in debt and without wage increases they cannot spend. Wage increases in a dwindling employment environment will not occur. Therefore the best than can happen is that the banksters, their ill-gotten gains and lifestyles are protected.
More succinctly there are plenty of folks that thing this is the last bullet. A massive mistake now – and a one trillion dollar gamble is huge – may be the last one before a general meltdown.
The very definition of the real evil for the economy is supposed to be inflation, according to the orthodoxy. Inflation itself simply being another word for general increases in wages to the middle-class – which hasn’t existed since we “beat” inflation during the Reagan years. This was done by crushing the only thing that pushed wages up across the board – unions and strikes. The theory apparently being being based upon the ides that the only good middle-class is a dead middle-class.
Don’t mistake valid concerns for the fate of our Republic for unimportant things like hurt feelings.
March 25th, 2009 at 11:17 am
Jeffrey Sachs does the figures over at Vox.
http://www.voxeu.org/index.php?q=node/3339
I’ll paste this huge excerpt, which is important, since it shows precisely how the FDIC is being looted for the banksters:
To understand the essence of the giveaway to bank shareholders, it’s useful to use a numerical illustration. Consider a portfolio of toxic assets with a face value of $1 trillion. Assume that these assets have a 20 percent chance of paying out their full face value ($1 trillion) and an 80 percent chance of paying out only $200 billion. The market value of these assets is given by their expected payout, which is 20 percent of $1 trillion plus 80 percent of $200 billion, which sums to $360 billion. The assets therefore currently trade at 36 percent of face value.
Investment funds will bid for these assets. It might seem at first that the investment funds would bid $360 billion for these toxic assets, but this is not correct. The investors will bid substantially more than $360 billion because of the massive subsidy implicit in the FDIC loan. The FDIC is giving a “heads you win, tails the taxpayer loses” offer to the private investors.
Specifically, the FDIC is lending money at a low interest rate and on a non-recourse basis even though the FDIC is likely to experience a massive default on its loans to the investment funds. The FDIC subsidy shows up as a bid price for the toxic assets that is far above $360 billion. In essence, the FDIC is transferring hundreds of billions of dollars of taxpayer wealth to the banks.
Back of envelope calculation: $276 billion
With a little arithmetic, we can calculate the size of that transfer. In this scenario, the private investors (who manage the investment fund) will actually be willing to bid $636 billion for the $360 billion of real market value of the toxic assets, in effect transferring excess $276 billion from the FDIC (taxpayers) to the bank shareholders! Here’s why.
Under the rule of the Geithner-Summers Plan, the investors and the TARP each put in 7.15 percent of the purchase price of $636 billion, equal to $45 billion. The FDIC will loan $546 billion. (All numbers are rounded). If the toxic assets actually pay out the full $1 trillion, there will be a profit of $454 billion, equal to $1 trillion payout minus the repayment of the FDIC loan of $546 billion. The private investors and the TARP will each get half of the profit, or $227 billion.
Since this outcome occurs only 20 percent of the time, the expected profits to the private investors are 20 percent of $227 billion, or $45 billion, exactly what they invested. Similarly, the TARP’s expected profits are also equal to the TARP investment of $45 billion. Thus, both the TARP and the private investors break even. As competitive bidders, they have bid the maximum price that allows them to break even.
The bank shareholders, however, come out $276 billion ahead of the game, while the FDIC bears $276 billion in expected losses! This transfer occurs because the investment fund defaults on the FDIC loan when the toxic assets in fact pay only $200 billion, an outcome that occurs 80 percent of the time. When that happens, the investment fund is “underwater” (holding more in FDIC debt than in payouts on the toxic assets). The investment fund then defaults on its debt to the FDIC. The FDIC gets $200 billion instead of repayment of $546 billion, for a net loss of $346 billion. Since this outcome occurs 80 percent of the time, the expected loss to the taxpayers is 80 percent of $346 billion, or $276 billion. This is exactly equal to the overpayment to the banks in the first place.”
The proposal is no different than the U.S. taking on the role of WashMu and handing out NINA loans. And it will come crashing back on the Treasury and the FDIC.
April 16th, 2009 at 10:13 pm
Good afternoon. It’s not the hours you put in your work that counts, it’s the work you put in the hours.
I am from Madagascar and now teach English, tell me right I wrote the following sentence: “New york airline listings airline tickets.”
Waiting for a reply
, Noya.
April 17th, 2009 at 1:07 pm
I don’t think those big named economists are offended by being ingored. Stiglitz is an opponent to the current system of governance and has been to the previous ones. The problem is with the mafia-style relationship between the Wall Street and the State. Of course, those guys are not part of that “circle of associates” like Gaitner, Summers or Paulson.
By the way, the saying about the cheek has an end: turn the other cheek, but don’t let it be slapped again. Exposing Americans to potentially bigger prolems in the future is like chaining people now and giving a wip to The Invisible Hand.