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Tuesday, February 10, 2009

"So What is the Plan?"

Paul Krugman says the Treasury's bailout plan is a bit vague:

The Rorschach plan (wonkish, or at least hard to read), by Paul Krugman: An old joke from my younger days: What do you get when you cross a Godfather with a deconstructionist? Someone who makes you an offer you can’t understand.

I found myself remembering that joke when trying to make sense of the Geithner financial rescue plan. It’s really not clear what the plan means; there’s an interpretation that makes it not too bad, but it’s not clear if that’s the right interpretation.

The plan deserves praise for what isn’t in it, at least as far as I can tell. There doesn’t seem to be provision for mass purchases of toxic waste at premium prices; there also doesn’t seem to be a massive “ring-fencing” guarantee against private losses on bad assets. In that sense the plan is better than what the last few weeks of leaks led us to expect. ...

So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place.

Andrew Leonard echoes the theme:

Geithner fails to deliver; market swoons, Andrew Leonard: Judging by the reaction of the stock market, Wall Street was very unhappy with Treasury Secretary Tim Geithner's speech Tuesday morning outlining the Obama administration's new strategy for resolving the financial crisis and "getting credit flowing again." Ten minutes after the speech ended, the Dow had fallen 300 points and appeared to be headed further south. ...

Geithner started out strong, with a clear description of the plight we're in, and a clear explanation of why government needed to take swift and strong action. But, once again, the speech was short on details -- and no more so than on the critical question of how the government will address the problem of dealing with the toxic assets that have effectively rendered large portions of the nation's financial system insolvent.

If there was a moment during the speech when investor sentiment crystallized, it came when Geithner announced that "we are exploring a range of different structures" to deal with precisely that issue.

At this point in the game, that kind of vague assertion simply won't fly. It's all fine and good to declare that there is a plan for encouraging private capital to reenter the markets, with assistance from government, and somehow remove the busted mortgage-backed securities from the balance sheets of financial institutions. But similar assertions have now been made for many months, without any practical plan emerging for accomplishing such a task. When Geithner said "we are exploring a range of different structures" he was essentially admitting that we still don't have a clue how to do this. And that's why Wall Street is panicking, again.

As for the rest of the speech,... Geithner's announcement that more details will be revealed of the homeowner rescue plan in "upcoming weeks" was not very illuminating. ...

Here's part of an interview from Bloomberg:

Interview with Secretary Timothy Geithner, U.S. Dept. of Treasury, Bloomberg TV, Transcript, Interview by Peter Cook: ...MR. COOK: Let me ask you some of the details of the plan you outlined today. Some of those details not totally in place yet, I know, and I want to ask you about one of them. This idea of a “bad bank,” you talked about a public-private partnership getting together to try and take up these toxic assets that have troubled financial institutions for so long now and locked up the system. Can you explain in any more detail how this is going to work, because there are a lot of people out in the marketplace, even after hearing you just a short time ago, still don’t know. ... Is the government going to buy these assets? Are these private entities going to buy these assets? And how are you going to value them?

SEC. GEITHNER: So let me do the basic concept and let me reassure you and the markets as a whole that this is very complicated to get right. And we’re going to try to get it right before we give people the details so that we don’t add further to uncertainty in these markets. But our basic objective, and why this is so complicated, is to try to make sure we’re doing it in ways that will protect the taxpayer...

The basic concept, again, is because the markets now cannot provide the financing necessary to get this to work – that’s sort of the definition of a financial crisis in some sense – that the government will provide that financing alongside some public capital in ways that bring private capital. And that is important because it will help protect the government from the risk that we’re taking on risk and assets we don’t understand, have valued too highly and are leaving the taxpayer with more risk than they should have to bear in this context.

That’s the challenge, in normalcy difficult to do, and we’re going to be very careful to get it right. We may not get it right exactly at the beginning and we’ll adapt it as we need to...

To me, Geithner's attempt at reassurance, that they're not quite sure how the program will work, or if they will get it right, but be assured that they are determined to keep tinkering with the program until it does work, has just the opposite effect. It undermines confidence. Why not wait until they actually have a plan before going public? Why were they in such a rush to reveal that they aren't sure what to do, or if it will work?

    Posted by on Tuesday, February 10, 2009 at 12:33 PM in Economics, Financial System | Permalink  TrackBack (0)  Comments (48)


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