From TARP To Mud

I'm hardly a Nobel-Prize winning economist, and so it disturbs me that even they are unclear just was Tim Geithner is trying to peddle with the new version of the banking industry bailout.

An old joke from my younger days: What do you get when you cross a Godfather with a deconstructionist? Someone who makes you an offer you can’t understand.

I found myself remembering that joke when trying to make sense of the Geithner financial rescue plan. It’s really not clear what the plan means; there’s an interpretation that makes it not too bad, but it’s not clear if that’s the right interpretation.

He's not the only one. Most are calling the plan vague and unclear, and the fact sheet doesn't help. There's a lot of use of Federal Reserve money to grease lending. There's this public-private partnership to buy the crap assets, which assumes that anyone would want to purchase them at all, even if seeded by Treasury funny money. And there's this "stress test" applied to banks to test their solvency, without any explanation of what happens if banks fail the test. Thus Geithner achieved the WORST of all possible worlds - a plan that looked close to a bailout of the banks and protection of the shareholders, without being clear enough for anyone to tell definitively. Thus, both public confidence and Wall Street confidence were not restored even a little, and the Dow responded accordingly.

Justin Fox' take is perhaps the best:

There are two cures for financial panic: dramatic action and the passage of time. Geithner seems to be of the opinion that, with the panic substantially abated since last fall but a lot of expensive problems remaining, the moment for dramatic action has passed. He reportedly fought off efforts by others in the Administration to come up with something more crowd-pleasing today. A long slog it is, then.

I agree that nobody knows what the banks are worth, and a "stress test" to see how they'll perform might be a good idea, but only if followed by wiping out those banks that have no chance of making it. The banks are insolvent and need to be nationalized, and probably will be, once we burn through hundreds of billions more because the Treasury Secretary is afraid of saying the word. When investment analysts are calling for a takeover, it's really not a wild or out-of-the-mainstream policy. The only thing standing in the way are elites.

I liked Krugman's other post, too.

I was going to dub the new financial plan TANF 2 — temporary assistance to needy financial institutions, without, you know, any of the means-testing or work requirements involved when poor people get help.

But Jamie Galbraith (private communication) has trumped me; he says it’s the Bad Assets Relief Fund.