by Frank James
First there was 2008's $152 stimulus package (remember those rebate checks?) Then there was last fall's $700 billion Troubled Asset Relief Program. Now Congress is considering another economic stimulus of upwards of $800 billion. And the American people ain't seen nothing yet.
That's because some experts believe that in order for the banks to clean up their balance sheets, they will need at least $1 trillion or more. That's $1 trillion more in additional money beyond the TARP program with the money being used to infuse needed cash into the banks and to remove so-called toxic assets from their books, all to give banks the maneuver room they need to start making loans again.
Experts say that until banks are recapitalized in this way, the credit needed by both consumers and businesses won't start flowing again and that any economic stimulus is doomed to failure.
But according to reports, Treasury Secretary Timothy Geithner, isn't considering asking Congress for an additional $1 trillion, realizing that would be spitting into the wind? Instead, the Obama Administration appears to have come up with a public-private partnership. The administration would use the remaining $350 billion from the TARP, with the Federal Reserve adding some funding by using its ability to create money and the rest coming from private investors.
As the Wall Street Journal explains:
The entity would be seeded with funds from the $700 billion financial-sector bailout fund, but the idea is that most financing would come from the private sector. Some critical elements remained unclear, including exactly how the government would entice investors to participate in the private bank, given that they can already buy soured assets on the open market if they want to. The government will likely offer some type of incentive, such as limiting the risk associated with buying the assets.
The New York Times has this explanation:
Details of the new plan, which were still being worked out during the weekend, are sketchy. And they are likely to remain so even after Treasury Secretary Timothy F. Geithner announces the plan on Tuesday. But the aim is to reduce the need for immediate federal financing and relieve fears that taxpayers will pay excessive prices if the government takes over risky securities. The banks created those securities when credit and home prices were booming a few years ago.
Besides devising a way to bring private investors into the bank bailout, the Treasury plan is expected to inject more capital into some banks and to give many homeowners relief from immediate foreclosures.
It also is expected to increase financing for a Bush administration program intended to encourage investors to finance such things as student loans and credit card debt.
What's unclear about this approach is whether it will succeed in giving the banks enough money to clean up their balance sheets. Simon Johnson, an economics professor at the Massachusetts Institute of Technology, has suggested in his blog, the Baseline Scenario, that we will be able to assess the seriousness of the Geithner plan by the answers we get to ten questions, including these:
6. How much money is Treasury expecting will be needed in the recapitalization of banks, i.e., what will be the net new injection of capital?
- If the answer is not at least $1trn, in line with the estimates of the IMF, then it's not enough. (Note: the headline number may need to be larger, depending on the approach; focus on the recapitalization/increase in capital of the banking system as the bottom line).
- We can rely on private capital also to inject funds, but only if the principles the authorities use for valuation of banks are very conservative so that there is adequate upside to new investors.
- If the headline amounts are less than $1 trillion, this is surely not enough.
- If the headline amounts are vague or we hear statements such as "it's too early to know," then the entire approach is not credible and we will need to reconvene when the Treasury is properly prepared and ready for a serious discussion.
7. Where will Treasury get this amount of money at short notice?
- The best answer would be a mix of private and public funding, but initially at least $1trn of public funding for recapitalization needs to be available.
- If the answer for public funding is: "the remaining TARP funds plus backstop loans from the Federal Reserve", this is unlikely to be enough.
- Treasury needs to request further funding from Congress in the next month or so, in particular several hundred billion dollars in additional debt limit authorization; this can then be combined with Federal Reserve financing to get to scale quickly.
- There is no substitute for an early and completely frank conversation with Congress regarding why this new funding is needed, how exactly it will be used, and what the impact will be on various stakeholders (including insiders at the large banks, new investors, and the taxpayer).
- If the Treasury requires banks to write down assets to market prices, it will provide the clarity needed for private investors to re-enter the market. The stock prices of the worst banks will fall because it becomes clear the government is not prepared to provide further cheap taxpayer money as a subsidy, but this will finally put the banks at valuations that attract new private owners willing to make substantial investments. The government will then be providing funds alongside the private sector and less government funding will ultimately be needed.
Comments
Spend that $1T on banks that are in good fiscal shape, if need be, but throwing good money at bad banks is bad policy.
Posted by: Xcellentform | February 9, 2009 10:12 AM
Confessions of a Heartless Republican
I’ve been called many things over my many years, a few good things, some not so good things, mostly average things, but never heartless. Still, I have to conclude that I am heartless. I’ve determined that I must be since I don’t feel sorry for subprime mortagees who may lose their homes or who may already have been dispossessed.
In my defense and to mitigate my heartlessness and insensitivity, I should add that I do sincerely and deeply empathize with the children of those people. Kids don’t understand such things as “foreclosures” and other multisyllabic words associated with the adult world. All they understand is that they are being uprooted from the place they’ve called home perhaps for their entire short lives and that they have to move to a different place, to different schools, to different neighborhoods where they will encounter strangers and be forced to make new friends and to acclimate to new environs.
All that is very difficult for youngsters and for those kids I have a great deal of sympathy because it’s all none of their doing or responsibility. For their parents, however, I have little empathy.
Before I am cast out from the society of human fellowship and tossed into the sewer of reprobate misanthropes, do hear me out.
This attack of heartlessness came on with a rush tonight as I watched on local news a horde of demonstrators armed with signs proudly declaring their status as subprime mortgage holders who were incensed. They were loudly picketing in front of homes of some CEO’s who were in some way associated with the effort to deny them the right to remain in their domiciles merely because they were unable to make their monthly payments to their mortgage holders.
I should add at this point that I have no sympathy with banks and mortgage companies, either. Many have operated immorally and unethically in granting home loans to individuals who they were fully aware could not afford them. Maybe they could pay the monthly nut during good times but when bad times struck they would be stuck. And bad times, as they inevitably do, have arrived with a vengeance.
Other institutions granted those loans under threats of being accused of discriminatory practices by the federal and local governments. Those, also, deserve condemnation for their corporate pusillanimity.
Some few resisted such governmental strong-arming, and those I would applaud, but they are relative rarities.
Which brings us to the question of precisely what “subprime mortages” and “subprime lending” actually mean. Terms of fairly recent vintage, USA Today defined the meaning: “Subprime lending — higher-interest loans to consumers with impaired or non-existent credit histories — has been the fastest-growing part of the mortgage industry.
Subprime mortgage activity grew an average 25% a year from 1994 to 2003, outpacing the rate of growth for prime mortgages.” http://www.usatoday.com/money/perfi/housing/2004-12-07-subprime-day-2-usat_x.htm
The operative words there are “higher interest” and “impaired or non-existent credit histories,” ...
(Read the rest of this article at http://genelalor.com/.)
Posted by: Gene Lalor | February 9, 2009 1:12 PM
Gene....wonderful post to give some true insite of a true pug. It's kinda like looking into Ed Geen's eyes. If you do not think that most of these home forclosures have a bad story of a job layoff or a medical visit, you are truly delusional. We are not all as rich as the pugs seem to be....although I see many of the pugs got caught up with 2nd and 3rd mortages.
Posted by: Xcellentform | February 9, 2009 4:20 PM