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Monday, April 13, 2009

How Long?

This argues that the administration is in denial about the need to recapitalize the banking system:

Geithner and Summers need to address the banking problems square-on, by Michael Pomerleano, Economists' Forum: The Obama administration program to address the fragility of the banking system is based on a two major initiatives. First, it has proposed the Geithner- Summers Plan to buy subprime securitized assets from the banks. The toxic assets plan deals with less that 40 percent of the balance sheet of the banks that is in marketable securities. It does not deal with the 60 percent of the balance sheets of US banks that are loans and are not marked to market. Further, it will take six months to get the program in motion. The plan elicited deserved criticism...

The second part of the administration program is the now famous stress test of the nation’s largest banks. ... This article argues that The Obama administration is in denial regarding the problems in the financial system. The losses in the banking system are not an “unknown unknown”. As shown below, the stress test calculations can be conducted by any informed analyst, and the losses are known with a reasonable degree with approximation. The stress test is simply a “smoke screen” designed to postpone the inevitable moment when the administration has to deal with the well known and severe problems in the banking system. ...

The banking system is severely undercapitalized, with numerous insolvent banks. Clearly a more robust banking system requires far more capital and a robust loan loss reserve adding to the capital cushion. Until the trillion plus of impaired assets are removed and the banking system is recapitalized, credit flows will be restricted. In this context, it is puzzling why the administration is tinkering at the fringes with programs designed to enrich Wall Street. Geithner and Summers need to address the banking problems square-on.

Six months "to get the program in motion"? That detail is new to me, but if that's the case, if they are kicking the can down the road that far, that's far too long to wait. Six months?

    Posted by on Monday, April 13, 2009 at 04:05 PM in Economics, Financial System, Policy | Permalink  TrackBack (0)  Comments (25)

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