Jed Graham on Geithner plan, and see the comments there too
His article,The Real Cost of the Geithner Plan, appears to be available to non-subscribers. He correctly challenges the Geithner plan.
Geithner has a plan to give relief to bankers, bank stock holders, and bank bondholders. Graham's plan tries to give relief to some mortgage holders and some investors. Neither one is right. But I think it is good to have alternatives on the table, other than Krugman's "nationalization" as the only apparent alternative to Geithner's PPIP.
If you read Graham's article, be sure to read the last part and the comments. The "last part" outlines his idea and starts after:
The more even half-way reasonable ideas considered, the better.
Treasury Secretary Timothy Geithner's toxic asset plan is a brilliant, highly complex and very expensive answer to the wrong question: How we can raise the value of bank portfolios without improving the quality of the underlying loans?While I think this criticism is correct, I also think it's limited - Geithner has other problems too. Graham then goes on to propose an iffy alternative:
It is truly remarkable that an administration that preaches progressive economics intends to deploy $1 trillion - including hard-to-value but nevertheless very pricey subsidies - to help banks in a way that avoids helping their existing borrowers.
This basically gives 50% rebates on the losses of imaginary investors and a big gift to some homeowners. Remember that most mortgages were repackaged then "sliced and diced" and even "insured" so it's rather unclear just how this gift package would work in practice. Yes, investors as a class need to take some losses. Yes, homeowners as a class have seen at least paper losses compared to bubble-peak prices and some have taken or will take real losses (selling or defaulting and losing any equity paid in). But that's hardly the half of it.In the second scenario, lenders reduce mortgage principal by $200 billion to qualify for matching reductions pledged by the government to spur a proactive restructuring of mortgage debt.
The second approach reduces outstanding mortgage debt by $400 billion and substantially stems the tide of foreclosures for the same price as the first that does nothing to reduce principal or limit foreclosures.
Geithner has a plan to give relief to bankers, bank stock holders, and bank bondholders. Graham's plan tries to give relief to some mortgage holders and some investors. Neither one is right. But I think it is good to have alternatives on the table, other than Krugman's "nationalization" as the only apparent alternative to Geithner's PPIP.
If you read Graham's article, be sure to read the last part and the comments. The "last part" outlines his idea and starts after:
There may be various ways of accomplishing this goal, but below is my suggestion for ending the foreclosure crisis that I first wrote about for RGE Monitor in November.I include the first comment from his article here as yet another "solution":
Here's a third approach:Is this simply blind ignorance of macro-economic factors, or sound wisdom?
1) Everybody pays their own mortgage
2) Those who can't pay, or don't feel like paying their own mortgage can rent.
3) Banks and speculators who lent money to people who can't pay, or don't feel like paying their mortgages, can foreclose, eat their losses, and lick their wounds. They will be replaced by wiser speculators, and better-run banks.
This approach has the advantage of not placing the burden of losers' losses on the honest, prudent majority of Americans.
The more even half-way reasonable ideas considered, the better.
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Thanks for facing the fact that Geithner, Krugman, and the others you mention are smart guys trying to solve a possbly unsolvable problem.
The FT wise men:Martin Wolf and Samuel Brittain et al all(ignore Merkel and the Bank of England guy, they're clueless) say that neither Geithner nor anyone else can succeed unless a lot more money is put on the table. Which the AIG bonus debacle has made extremely unlikely. Arguably whatever assets Geithner and Summers brought to the game were vitiated by their political tin ears in that case.
In retrospect-and I got this wrong- the situation required a Bentsen not a Rubin.. Instead G&S are well on their way to wrecking Obama's entire program.Everything.
Not to mention the whole world's economy.
In fact maybe the Treasury hsa become, like the DOD, and should be under civilian (.i.e. non bankers) control.Since Glass Steagal's demise Banking's too important to be left to bankers .
Put Rahm in charge. Not formally , that would take too long, just make that the reporting chain until we get out of this mess. G&S won't like it, but they owe Obama big time.
April 4, 2009 8:20 AM | Reply | Permalink
"possibly unsolvable"
There are competing interests at work. Basically that means war if only 'sub rosa'. Think Israel/Palestinians/Jews/Arabs/Muslims/US/Oil/... for an exemplary parallel. We have homeowners/speculators/brokers/bankers/investors/government/other-countries/gamblers/crooks...
The question is: Will the value conflicts pull down (destroy) the economy (the society) leaving a new value/power hierarchy to emerge from the ashes of the economic and political chaos, or if not, if we don't have to go through a revolution and massive destruction then what will the value hierarchy be, whose values will be promoted and whose will be demoted in a semi-orderly fashion?
What concerns me is that what passes for debate, and I'm not saying I see all reasonable debate so maybe I'm just ignorant here, seems to be silly sniping from critics of the Administration accompanied by effective silence from the Admin in return. It also concerns me that I have not seen Geithner address what I believe are real and legit concerns about PPIP, both internal and in terms of "rent-seeking" or gaming the system. G's silence leads me to believe he's ignoring these factors.
I also have my hunch that the main problem is due to contracts which violate the public interest and should simply be declared null and void or forced to restructure. Crisis is not a time to pretend that private contracts are sacred cows.
This doesn't mean "cramdowns" should be forced arbitrarily on lenders who loaned money to people to buy houses who cannot or will not repay it in full. It does mean that the network of financial instruments might need to be deconstructed to some extent, and that gambling and crooked interests need to be shut out.
The government should not "solve" the problem by throwing money around, it should do so legislatively and via moral authority aka the "bully pulpit". Some reports such as the "pitchforks" remark by Obama to bankers are hopeful.
It's also not clear how much of this "crisis" is simply modest liquidity/sovlency problems being spun up into hurricane-strength scare talk.
If the economy was indeed propped up by unsound spending based on unsound borrowing, then we really need to acknowledge that the economy needs to contract significantly (my guess: 8-15% for 1-2 years) before we can consider renewed growth. Government borrowing at very cheap rates (1% would be cheap) is acceptable as a form of short term stimulus, but long term budget deficits are not acceptable.
So I find myslef sadly with one foot in each of at least two camps -- The idiotic Repos and the fiscally conservative Demos, and the hope for progress which Obama represented during his campaign but which his people aren't showing me at all well.
April 4, 2009 1:59 PM | Reply | Permalink
A very impressive statement. I couldn't possibly have formulated it but I know just enough to admire it.
April 4, 2009 6:23 PM | Reply | Permalink
I'm honored!
April 6, 2009 3:37 PM | Reply | Permalink
in direct reply to some other parts of your comment:
"In fact maybe the Treasury h[as] become, like the DOD, and should be under civilian (.i.e. non bankers) control.Since Glass Steagal's demise Banking's too important to be left to bankers ."
I couldn't quite follow the first sentence, maybe an extra comma or two? And don't forget there's the Fed in the equation too. I definitely think that the Cabinet level doesn't seem to be where Geithner belongs, he's more a technician at best. Obama needs a neo-Volcker or some such between him and the technicians, one who know politics, economics, and finance. Unfortunately we have Summers as a kind of shadowy puppet master, in direct contradiction to the notions of transparency and honesty.
"Put Rahm in charge. "
How so? Because he made a few quick millions on Wall St., or despite that? Because he has a rep as being hard-nosed, or despite that?
April 4, 2009 2:10 PM | Reply | Permalink
Obama needs a neo-Volcker . . . .
Geithner's too short.*
* "They walk around tellin' great big lies."
April 4, 2009 2:41 PM | Reply | Permalink
The 70s when you could still buy 78s!
April 4, 2009 4:44 PM | Reply | Permalink
Your question about
Neither old-school (pre Glass Steagal)reasonably prudent bankers nor the new anything-goes cohort ought to run Treasury. The first aren't equipped with experience in the new "dance" (Charlie Prince's characterization). The second aren't morally equipped. So look for a non banker.
Re:Rahm. Geithner and Summers can't handle congress. Maybe he can't but he'd have a better chance.
April 4, 2009 6:20 PM | Reply | Permalink
I'm annoyed -- though not surprised -- by the knee-jerk reaction to the term "nationalization" which is reminiscent of the tactic employed by the Have-More's when they scream "Socialism" to short-circuit debate over any sort of policy/program that addresses disadvantaged people who are struggling to survive. It's not as though the government would then own forever those banks that would otherwise fail. And Krugman makes clear he is talking about only a small handful of insolvent banks, not all banks, most of which are not insolvent.
We The People already own 80% of AIG. It deserves to be treated as a ward of the state.
April 4, 2009 3:11 PM | Reply | Permalink
Since we don't really know which banks are strictly insolvent, nationalization is jumping the gun. The idea that we need to make banks lend more is ludicrous. There are good reasons and bad reasons why lending/borrowing is down. Separate them from each other and then deal with each separately.
Again, we don't actually own AIG, we own paper on AIG paper. But how is it NOT being treated as a ward of the state now? It's getting a huge allowance and being allowed to run around the estate largely as it likes.
We don't want AIG's liabilities to become ours. We should want AIG's creditors to take orderly haircuts, and for those creditors who were gamblers or crooks to meet their fates properly.
April 4, 2009 4:50 PM | Reply | Permalink
To give spoiled brats with gambling addictions more means with which to run amok yet no disicpline is not my idea of parenting.
I agree with the need for severe haircuts -- not to mention cold showers with thorough scrubbing, followed by packing them off (with an escort of pitchforks) to reform school -- with a no-nonsense curriculum and lots of community service in all the neighborhoods devastated by their greed-fueled self-delusional irresponsibility.
There's no good reason to continue to support their aristocratic lifestyle with no questions asked. They need to be "ruined" as a grim warning to all who might be tempted to emulate them in the future.
I suspect much of their refusal to grease the machinery of Main Street is little more than a tantrum trick to scare what's left of the middle class into giving in to their endless demands.
Anything "too big to fail" was too dangerously big to have been allowed to exist in the first place.
Seriously, I bet it's far from impossible to figure out which banks are insolvent.
April 6, 2009 9:23 AM | Reply | Permalink
Obama is not going to take the "ruin the bankers" route, but if we (that means you too) push him rationally, he might go for sizable haircuts and delousing for bankers.
The hard part about figuring out solvency is largely in the genuine value differences at work in the markets, never mind the questions of "fair value" as an appropriate or inappropriate way to value assets.
April 6, 2009 3:50 PM | Reply | Permalink