February 10, 2009

Geithner's Competence Reassuring but...(Update)

We are in the midst of dealing with the one of the most far reaching situations our democracy has ever faced -- a swirling mix of moral hazard, the interests of the people, our economic outlook, and complex questions of how to pull some good out of the huge mess that is the end of the decades-long credit bubble.

Since it's already clear to most people that we have many banks likely to be revealed as insolvent, and perhaps all too many (some on that below), I'd like to focus on a few big picture aspects and thoughts of the moment.

While the general outline of the new plan for banks doesn't yet have the decisive details that will determine the eventual return of future taxpayer money sent to rescue banks, the outline itself is encouraging to me in a couple of ways. A suggestion of some good possibilities (or better rather than worse choices) appeared today. Here, I'm only going to give some impressions and initial thoughts.

By combining several fundamental ideas, the new plan seems likely to have effective elements -- its odds of at least partial success are raised by a combination of solutions.

But the most striking thing listening to Geithner’s testimony today was his general and specific competence.

Update: The open question though is whether Geithner will try to maintain vested interests at taxpayer expense (such as reverse-Robin-Hood welfare for shareholders of insolvent banks). As of 2/23, this remains to be seen.

The combination of ideas together with first-rate competence give me reason to hope for as good an outcome as might be managed. We'll see.

In the meanwhile, Calculated Risk has an interesting post with a general outline for the "stress test" (examination of bank solvency).

Yves Smith points out many or most of the likely and possible bad aspects of what we know to date. I'm sympathetic to her wariness. Recent history suggests when there is a possibility of transferring wealth unjustly through government, it often happens.

As to the estimates of how much U.S. banks are in the hole, it's notable that Kenneth Rogoff gives a number like $2T (says Yves). (here's a brief CNBC Rogoff bit -- "$2 or $3T")

One good question this raises is whether if we willingly put some large banks into FDIC or other restructuring-like processes after an examination ("stress test"), just how many large money center banks might we wish to insist on saving, once the worst case banks are removed? (Because we all know perfectly well we won't disappear all the large banks.)

Taxpayers are already on the hook for the losses because FDIC was created federally with federal backing. FDIC has something like $35-$40B in its reserve. Compare that to $2T.

I understand perfectly the righteous anger that would want most all of the bank officers that have achieved insolvency to go. I still hold we should prefer some (more than 1 but less than most) of the worst larger banks to be restructured or dissolved --which means FDIC or similar process -- new control, new bank officers or absorbed into other banks, etc. We then choose to recapitalize the better-managed large banks. And finally, encourage the best banks to expand. (and specifically to allocate capital to favor the best!) This is a pragmatic idea of trying to give more lending power to the best lenders. Speaking in general terms, I could imagine something like up to eventually 1/3 (or in a worst case 1/2) of the biggest existing banks getting processed and their officers losing control, and then some of the remaining banks diversely gaining portions of the pieces.

But to specify much presumes more information than any one person has (I think!). We don't yet know precisely how good things are at some of the presumably better banks, those with lower portions of nonperforming assets, once "stress tested".

Of course, we should like to see some relatively well-managed banks, of all sizes, and especially the best banks of medium to larger size, expanding a great deal within a year or two. That would demonstrate a good outcome.


Update: we have a nice bonus -- Krugman and Rogoff on the Newshour

Or video of complete segment with intro.


  1. I'm glad someone thinks Geithner is competent. I've been reading up on his announcement, including your very interesting links, and I'm afraid he sounds all too much like Hank Paulsen (only with more hair, as Yves Smith notes; the question is, does he have more hair than wit?). I was distressed by the reports that he stood out against White House requests to put restrictions on the banks; frankly, I think the banks need restrictions. In fact, I want Glass-Steagall back.

    I do agree that a general (and public) audit, so we will know who really is incurably insolvent, is a critical next step - this should be applied to every major bank that has taken the government's dollar. Unless it is forced on them, you'll never see it; no major bank will admit this sort of thing openly except under duress.

  2. The "stress test" idea shows they know what to do.

    The only question is will they do it. I think so.