Geithner's new plan could work.
It's not fundamentally flawed. Krugman's objections about distortions to price discovery with non-recourse loans can be managed, most likely. Whether a 'better deal' for taxpayers is possible through bankruptcy or nationalization - that's hard to weigh. Certainly a better price on the assets is available via receivership, but that's not the whole story, for that course of action.
The better question is what if the plan does not work.
If they do not get sufficient private capital, what will they do? How deep is the problem, currently, we don't know - so we cannot say if they will be able to force the changes required, using 'stress tests', in the period of time during which they *must* do so, before fiscal stimulus peters out.
I'd say they have to do it all within the next six months, or at least have a very large chunk done by this year's end. Can they make that kind of deadline? If not, then what?
Nevertheless, I have to say, though, that the amount of money that we are throwing at the banks is incredible. The tax-rebate from last year, a large chunk of it used to pay off debts. The tax-cuts of this year, a large chunk of it likely to be used to pay off debts. Paulson's give-away. The 'consolidation' of WAMU and Wachovia and 100+ more others to follow. Geithner's acceptance of participation in swap of preferred for common equity. Rate jack-ups on revolving consumer loans. Second tranches to BOA/Merrill and Citigroup. Buy-downs on mortgage rates. This list astounds.
Tuesday, March 24, 2009
Thoughts on Treasury's New Plan
