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

Thursday, March 26, 2009


You may have noticed that I am not an economist. I like to keep up with these matters, but at times it feels like, to quote one of my favorite authors, intellectual mountaintop air so rarified I have to constantly swallow to pop my ears. This adequately appropriates my experience with the Public-Private Investment Plan (PPiP) for toxic assets (or legacy assets, or whatever you want to call them). I can link to a bunch of very smart takes about whether or not it will work:

Simon Johnson and James Kwak, closest to my view, I think, say that the plan could work, but only if the banks agree to sell at reasonable prices, an unlikely scenario; and that ultimately, the problem is the outsized influence and power of the big banks.

Paul Krugman says - you know what he says.

Krugman, Johnson, Brad DeLong and Mark Thoma participated in a vigorous debate about the plan on the NYT blog. And there's another live discussion with DeLong, Thoma, Kwak and Felix Salmon.

Then there's Karl Denninger. And Noam Scheiber. And Martin Wolf. And Nouriel Roubini, who actually likes the plan. And Bo Lundgren, the guy who administered the Swedish model, who actually lines up pretty well with the Obama Administration's thinking, believe it or not:

"I'm a market liberal. My party that I used to lead, the Moderate Party, is the conservative party in Sweden and the parallel to the Republican Party in America," Lundgren said. "When I nationalized the banks, it wasn't because I wanted to: It was crisis management. Their owners had been wiped out, the banks were black holes, they had no equity left, and there was no alternative but to take them over." [...]

The Obama administration's initial plans have fallen short, Lundgren said, because they failed to reassure investors that the banking system was genuinely backed by the government and private sector.

"There are similarities [to Sweden's case]," Lundgren said. "There are three things any plan must do—the first is to maintain liquidity, that's taken care of by the Fed. The second thing is to restore confidence, and that hasn’t been done so far and obviously the first proposal to buy toxic assets wasn't enough. And then you need capital injections so banks can keep lending at the levels needed for the economy as a whole."

However, Lundgren said that Obama was correct in observing that a similar nationalization scheme might be more difficult given America's size and preeminent role in world finance compared to Sweden.

"With Japan and Sweden, the crises we had, even if it was a very long process with Japan, they were crises that we had on our own," Lundgren said. "The rest of the world economy managed to be not perfectly good but still reasonably good. This time it's worse; it's a kind of financial tsunami."

My point is that there are a lot of opinions here, all of them valid in one way or another, since so much of economics is based on modeling and theoreticals (cue the old "we'll assume a can opener" joke). So I'm going to put my thoughts into some bite-sized portions.

1) Getting a reasonable price for the assets seems to be the key. If Geithner manages to get authorization to wind down big firms like bank holding companies, that could be a powerful bargaining chip for eventual nationalization, which would incentivize the banks to sell.

2) Judging from Geithner's comments, I'm guessing that he saw nationalization as too costly and too risky, because the government would assume all the potential losses. There's some truth to this - the largest FDIC receivership of recent vintage, IndyMac, cost much more than the government expected, about 1/3 of its value. The range of options indeed are from bad to worse. But if you have to go back to receivership after this plan fails anyway, I don't see how it could be cheaper. Plus, the government is putting up 90% of the risk in this scenario, anyway. To quote Dean Baker, "It implies there are real big losses there, but those losses are there whether we take them over or not. It's very likely that we're looking at a larger hole than the administration has been acknowledging and to my mind that argues for a takeover strategy."

3) If Citi and BofA are indeed using TARP money to buy up their own bad assets while being subsidized on both sides by the US government, we have to have some criminal prosecutions at that point. There is substantial evidence that this is happening already. This is doubly weird considering that Bank of America's top analyst doesn't think the plan will work.

4) Chris Bowers' post on how and when we will know if these economic policies succeeded is worth a read.

5) Even in Roubini's (somewhat) positive account, he says that "The administration should be transparent in making clear that there is still a wealth transfer taking place here - from taxpayers to investors and banks." We were always going to pay dearly for this - the debate is on the margins of whether we pay a lot or a whole heckuva lot.

Anyway, if you want to join this maddening debate, the FDIC website has opened up a public comment section.

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