by Frank James
Dean Baker was one of the few economists who saw the housing bubble years before other experts noticed it, which was only after it burst.
So he has a right to have a little swagger. And right now you can sense his confidence in a piece originally on the truthout.org website in which he says the same "experts who missed the housing bubble" or "EMHB," his abbreviation for them, are wrong to believe that Treasury Secretary Tim Geithner's plan to get toxic assets off bank sheets will work.
An excerpt:
These geniuses have devised a plan that for $1 trillion (approximately equal to 300 million kid-years of SCHIP, the State Child Health Insurance Program) can alleviate the stress on the banking system. Note that no one claims that $1 trillion spent on the Geithner plan will actually clean up the banking system - that would be asking too much. The EMHB only assure us that this $1 trillion (more than enough to have energy conserving retrofits for every building in the country) will make things better. Isn't that enough?
Oh, by the way, some people will get very rich off the Geithner plan. Some hedge and equity fund managers could make hundreds of millions or even billions off the Geithner plan. And, under current law, they will pay a lower tax rate on this money than a schoolteacher or firefighter. Are you sold yet?
Baker has what he thinks is a better plan than Geithner's.
Here's another excerpt:
The core problem is that many of the largest banks are bankrupt. They are currently concealing this bankruptcy by listing assets on their books at prices that are far above their market value. In principle, they can do this for a long time, unless the government forces them to write-down the value of these assets. As long as the banks are bankrupt, they will not make new loans, limiting the ability of many businesses to get capital.
Instead of Geithner's plan to allow banks to sell these assets at a subsidized price, we can go the other way. Geithner could have announced a plan to clean up the banks, following a standard FDIC-type takeover.
This approach could harness the power of existing bondholders to help the government clean up the banks quickly. Geithner could, for example, promise to honor the banks' commitments to bondholders in full, if the banks recognized their losses immediately. Bondholders, however, would be offered a lower payback rate for each month that the banks waited.
So, if a bank waited one month, the bondholders would only get a guarantee for 90 percent of the value of their assets. If the bank waited two months, the payback would fall to 85 percent and so on. (Note the issue here is bank bonds that the government has no legal or moral obligation to pay off. The government will, of course, pay off the banks' FDIC-insured deposits.)
Under this kind of a plan, bondholders would place enormous pressure on the banks to recognize their losses. Bank executives that refused to own up to the bank's bad assets might even face personal liability. In other words, executives who lie about their bank's assets might not just lose the bonuses that came out of TARP money, they also might lose the tens or hundreds of millions of dollars they "earned" during the housing bubble.
If President Obama's advisers, all of whom are leading members of the EMHB camp, had more imagination, they might have devised a plan like this for dealing with the banking crisis. Instead, they came up with a plan that will enrich Wall Street and further punish Main Street.
I'm no economist but it seems one potential problem with Baker's plan is that it's unclear how banks would know how much to write down their assets. Banks have complained that they are being forced to value their assets at "market price" when there is no market since the assets can't be traded.
One virtue of Geithner's plan is that it would arrive at some kind of price for the assets through an auction process.
But maybe Baker has a solution for how banks would solve the problem of valuing their assets for the purpose of writing them down under his plan. Again, he's a smart economist who saw the bubble well before most of his fellow economists did.
Comments
Geithner was a mistake.
BHO's 'team of rivals' was a mistake.
They should have gone in high and hard. They are trying to save a version of capitalism that should not be saved.
We will end up with the same rotten system on life support. These people need to be on a short leash.
Posted by: C.Morris✈ | March 31, 2009 7:34 PM
Of course its going to fail. You simply can not spend your way out of a recession. Thats ecomonics 101. I am fearful for our country,
someone has to come to the forefront and wake this administration up. Get out of the public domain, stay out of private business and private lives,
Get a clue, before you put us in a position that we will not be able to recover from.
Posted by: Paul | March 31, 2009 9:43 PM
I saw the housing bubble in Chicago years ago, just riding the train every day through all those see-through apartment buildings being built from 12th street down to McCormick Place and beyond.
How could all those units be absorbed by real homeowners? The couldn't. Developers were lying to Fannie Mae lenders and anyone else involved.
There aren't that many yuppies in the entire country to fill all those units, which are still under construction.
Anyway, this is just a further phase of the Paulson initiated panic-raid on the treasury.
The "private investors" are going to "unbundle" the exotic synthetic securitized mortgage vehicles and keep all the viable ones for themselves, leaving the taxpayers to hold the junk.
Doesn't Obama see through this?
Even JMKeynes pointed out that if enough money is spent, an economy might revive--
the famous example of just burying currency in abandoned coal mines and then hiring people to dig it up again.
The Geithner plan is a variation on this, with the twist that the "private investors" will end up with any meat that is left on the bone, and taxpayers will get the bone.
Posted by: ornery | April 1, 2009 12:58 AM
Hey Ornery,
Wifey and I rode the South Shore to Randolph downtown for years. Is that your train?
Paul,
I think you can spend your way out of a recession.
Remember that the 'stimulus plan' and the 'bank bailout' are separate plans.
If anything, the 'stimulus plan' is too small.
Posted by: C.Morris✈ | April 1, 2009 8:24 AM
Where does the money to "spend your way out of a recession" come from?
It comes from taxation, which takes money out of the economy, borrowing, which takes money out of the economy; the stimulus just takes money out of the economy and puts it back in different places.
The alternative is just to print more money, which is inflationary; the net result is that there is more money, but the total value of that money remains about the same.
"Stimulus" is just another word for "redistribution."
Posted by: DaveB | April 1, 2009 9:03 AM
I don't think anyone really knows. It is all a bunch of opinion. One guy says it's too much, the next guy says it's not enough. I say it's too early to tell.
Posted by: lochnessmonster | April 1, 2009 9:17 AM
Ornery,
I've often wondered the same thing as I also pass by that neighborhood on the train (7½ year+ South Shore veteran here) every day.
I also think it's too early to tell at this time.
Posted by: Brian M. | April 1, 2009 1:21 PM
This bank rescue plan stinks. My understanding is that private equity firms put up something like 7%, then stand to share in 50% of the profits, should these so-called toxic assets ever regain any type of value. Sounds like the shaft to the taxpayers.
C. Morris, I don’t doubt we can spend our way out of a recession by borrowing and injecting ridiculous amounts of money into the private market. Do you think we have the right to? Do we have the right to make our lives more comfortable by saddling future generations with unsustainable debt? They have no voice here. They just get the bill. George Bush, to his shame, let the public debt go from about 5.5 to 10.5 trillion under his nose. Obama doesn’t even blink when he lays out plans for it to go from 10 to 20. This is not sustainable. Tell me it didn’t make you uncomfortable watching Hillary trying to pitch T bills to the Chinese. Get used to that.
DaveB, I agree that taxing and spending by the govt is not stimulative. Govts don't create wealth, they can only redistribute it - at a net loss when factoring in costs for collection, oversight, etc. I disagree, as I stated above, that borrowing and spending can't be stimulative. I think it can and will be. The questions are do we have the right to do this to future generations to help us out of a hole we created for ourselves, and is it sustainable? I tend to lean toward no for the first, and definitely no on the second.
Posted by: Herbie H. | April 1, 2009 2:41 PM