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Tuesday, March 24, 2009

While Wall Street and Tim Geithner are having their circle jerk...
Posted by Jill | 5:19 AM
...Paul Krugman weighs in on the Tim Geithner No Banker Left Behind plan in an interview with Amy Goodman:
Krugman: A zombie idea is an idea that you keep on killing, because it’s a bad idea, but it just keeps on coming back. And what this is is we’ve had this idea since Henry Paulson came out with his plan six months ago, the Bush administration, that the real problem is that the market is undervaluing all of these toxic assets, and what we need to do is have taxpayers go in and buy them at a fair price, and that will solve all of our financial problems. And that’s what happened. The Geithner plan is a complicated, disguised variant on the same idea. It’s the zombie that you keep killing, and it just keeps coming back.

Goodman: Called “cash for trash”?

Krugman: Yeah, that’s—that was the phrase that was out there six months ago, which I picked up. And yeah, it’s basically saying that, you know, there’s nothing really fundamentally wrong with our banking system; there’s just this crisis of confidence, and so nobody wants to buy, you know, asset-backed securities, nobody wants to buy stuff that’s ultimately backed by home mortgages, and if only we could get people to see that these things are really pretty decent assets, then the banks will be in fine shape. And that’s the trouble. You know, there’s an argument that says maybe they were somewhat underpriced, but to make this the centerpiece of your financial rescue plan is just—well, as I wrote in the column, it leaves me with a feeling of despair.

[snip]

Krugman: The important thing is not the shared equity. I’m sorry, it’s hard to avoid lapsing into jargon here. But 85 percent, at least according to the counts over the weekend, 85 percent of the money is going to be a loan from the government, which is a non-recourse loan, which means that it’s backed only by the assets that these guys are buying, which means that if the thing loses more than 15 percent of its value, which is highly, you know, possible, given how uncertain these things are worth, then the investors, the private investors, just walk away. So there’s—exactly, it’s a heads I win, tails you lose. If the stuff—you buy something at $100 and it goes up to $150, you make $50. You buy it at $100 and it goes down to $50, then you only lose $15, because the other $35 gets even by the taxpayer. So it’s a—it’s the same thing.

It’s basically what happened with savings and loans in the 1980s. They were deregulated and basically put in the position where the deposits were guaranteed, but the owners of the banks could do whatever they wanted, and so they took these huge risks, and most of the risks turned out bad. But if the risks turned out bad, it was the taxpayers’ problem, not the bank owners’ problem. Same thing here. They’re deliberately setting it up, so that there’s this huge incentive to—you know, basically where the upside belongs to the private investors, but most of the downside belongs to you and me.


And that is the fundamental problem with this hostage situation in which we find ourselves. And this article from the Wall St. Journal (via Hilzoy) tells us the sad tale of how the Obama Administration -- and the rest of us -- are nothing but Wall Street's bitch, with the bankers' proverbial gun at our heads and the threat "Nobody move or I'll shoot":
In recent days, in spite of public furor over huge bonuses paid at American International Group Inc., the administration has concluded that it needs the private sector to play a central role in fixing the economy. So over the weekend, the White House worked to tone down its Wall Street bashing and to win support from top bankers for the bailout plan announced Monday, which will rely on public-private investments to soak up toxic assets.

But weeks of searing criticism by politicians and the public had left bankers leery of working with the government. After brainstorming about what to do about that problem, the White House resolved to try to take control of the debate, according to several administration officials. In weekend television appearances, President Barack Obama and other administration officials tempered their criticisms of the financial sector.

Meanwhile, Treasury Secretary Timothy Geithner and his colleagues worked the phones to try to line up support on Wall Street for the plan announced Monday. They told executives they don't favor using the tax code to retroactively penalize specific individuals who had received bonuses, according to people familiar with the calls. They asked officials to sign on "in pencil, not ink," and to "validate" or "express support" for the plan, these people say.

Some bankers say they turned the conversations into complaints about the antibonus crusade consuming Capitol Hill. Some have begun "slow-walking" the information previously sought by Treasury for stress-testing financial institutions, three bankers say, and considered seeking capital from hedge funds and private-equity funds so they could return federal bailout money, thereby escaping federal restrictions.

"Our great challenge is to make clear that we can't have an economic recovery without Wall Street, but these AIG bonuses make it that much harder," said David Axelrod, President Obama's top political aide, in a recent interview.

The administration "is adjusting to find the right balance" between politics and policy, says Thomas Nides, chief administrative officer at Morgan Stanley. "The White House understands that to have a healthy Main Street, you need a healthy Wall Street."


Uh....I'm no economist, but isn't that backwards? Isn't that precisely the bubble model that got us into this mess in the first place?? Doesn't this imply that the way to make Main Street happy is for banks to allow the denizens of the aforementioned Main Street to borrow as much money as they want to buy flat-screen TVs, rather than, oh, say, give them DECENT-PAYING JOBS so they can perhaps afford to buy things like food and clothes for their kids out of READY CASH? Isn't this "cure" for our financial ills just more hair of the dog that bit us?

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1 Comments:
Blogger Bob said...
"Some bankers say they turned the conversations into complaints about the antibonus crusade consuming Capitol Hill." The "crusade" is a populist sentiment from outside Capitol Hill. Nancy Pelosi would love to shut it out or shut it down. It's forcing the dogs to growl at their masters, but they don't want to bite.
3/24/09, 1:25 PM  
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