LOOK AWAY, RUN AWAY, OR ENGAGE? ABORT, RETRY, IGNORE?
No One Knows
New idea is to pass out a bunch of government guarantees to fix the problem.I don't like it, much, at all.
- It doesn't get around the problem of pricing - how much do you guarantee and for how long?
- What do you guarantee - the assets or the institution? (What if a foreign bank bids for the shares of a U.S. mega-bank? Do they trade with or without the guarantee?).
- There is no risk sharing, public-private - the taxpayer takes up the "long tail" (that's just stupid, I think).
- There is no debt removal from institutions (as required during a debt-deflation?).
- It offers no control over timing - all those guarantees could come due simultaneously. It also looks profoundly rosey-eyed, unless there is compelling reason to believe that such guarantees would never be cashed-in. (Remember the Bush failures of hope-for-the-best, don't-plan-for-the-rest?)
Most of all, it doesn't do anything to accelerate the market clearing of bad-debts, consumer or institutional, either into strong hands of private investors or the long-term hands of the government or some combination of the two. (It doesn't leverage the power of the Fed to solve the problem, either...it relies solely on the Treasury).
We have just about 18 months of 'big stimulus' to work with, because of the way "Reinvestment in America" has been rushed together.
Will Citibank's balance-sheet be clean by then? American Express? GE Capital's? BOA's? The Great American consumer? The housing market adjustment, as accelerated under Obama (hey, a guy can hope), complete?
Can we really expect no more losses in the banking sector after 18 months? I mean, it's almost completely unreasonable to expect a turnaround, if the banks are still making losses. Afterall, they could get by with zero capital, so long as they are not making losses, yes?
