As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."

Tuesday, February 10, 2009

Wondering Where Your Children's Future Is Actually Going?

Here we are:

The gravity of the financial crisis confronting the Obama administration will come into stark focus today when officials unveil a three-pronged rescue program that may commit up to $1.5 trillion in public and private funds, and possibly more, lawmakers and other officials said.

In announcing the plan, Treasury Secretary Timothy F. Geithner will not ask Congress for more funds than the roughly $350 billion that remain in the Treasury Department's original rescue package for the financial system, though congressional sources said such a request could come later if the new programs are unsuccessful. The rest of the money would come from other government agencies, such as the Federal Reserve, as well as private-sector contributions [...]

Geithner plans to announce a public-private partnership that would seek to finance the purchasing of toxic bank assets that are at the heart of the credit crisis, officials and congressional sources said. These sources briefed by Treasury officials said the program may initially raise $250 billion to $500 billion in public and private funds to offer low-cost financing to encourage investors to buy the toxic assets. An administration official said the proposal is still subject to a public review and may not take final shape for several weeks.

A second initiative will broaden the scope of a Federal Reserve program aimed at unclogging the markets for auto, student and other consumer loans. That initiative may expand to as much as $1 trillion, using $100 billion from the Treasury's rescue funds, and include aid for commercial real estate markets.

A third program would offer direct help to the nation's largest banks. The government plans to conduct a review of major financial firms to determine how much they may need. Any federal aid would come with conditions that would give the firms incentives to pay the money back as soon as possible. The review would determine the ultimate price tag of this program.

I don't even have to hope that the public doesn't believe that they'll see any returns, at this point. I know they don't.

Geithner is apparently a smooth inside operator, and he shot down practically every one of the more reasonable ideas coming out of the Administration, ideas they'll probably have to turn to after this money is thrown away without an appreciable increase in lending.

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.

He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.

In other words, he prevailed on those who had the interests of people, and so the interests of executives on Wall Street will be in the foreground. Taxpayers will take all the downside risk and get none of the upside profits.

I agree that nobody knows what the banks are worth, and the "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. But that's not what's happening. Geithner is keeping his friends whole while the rest of the nation starves. And there's not much rhyme or reason to it, either.

I am so disgusted with this entire proceeding that I am going to dispatch it quickly.

Let's start with the basics. The US banking system is insolvent. Got that? Insolvent. That does not mean every bank in the US is toast, in fact quite a few are probably just fine, and another large group is no doubt hurting and undercapitalized, but a couple of years of not shooting themselves in the foot again would enable therm (via earnings) to rebuild their equity bases sufficiently to proceed more or less as normal.

The history of major banking crises unambiguously shows that insolvent financial institutions need to be resolved. There are variations on the theme: the government can take them over and recapitalize them, clean them up and re-sell them, a la Sweden; you can wipe out equity investors and bondholders; you can try new twists, like various good bank proposals that have surfaced lately (making new entities out of the deposits and good assets and leaving the dreck with the existing bond and shareholders). While there would be many important details to be sorted out, this is not path breaking, except in the scale at which it needs to occur. And now, having had four actute phases of a credit crunch, the Fed and other central banks have plenty of liquidity facilites ready to deal with any initial overreaction. Rest assured, although radical measures would not be pleasant or easy, there are plenty of models and precedents. we have another scowling Treasury secretary, with a bit more hair than his predecessor, serving up the same fatally flawed approach as before: let's just throw money at the banks and hope they get better. This is tantamount to using antibiotics to treat gangrene. You waste good medicine and the progression of the rot threatens to kill the patient.

They won't break the backs of the elites, who still control this area of policy. And it's deliberately sketchy, with no numbers nailed down, so that they can respond to criticism with an answer like "we are still reviewing the options."

Terrible, terrible, and at this point, not even the stimulus is going to make up for this massive loss of capital. We'll be back here talking about a new plan in six months.

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