From BronteCapital, via the indispensable Mark Thoma, this was an excellent post, excerpt:
…it is simply illogical to believe that
(a). The banks are largely insolvent,
(b). The right or actual government policy is guarantee big banks (ie no more Lehmans) and
(c). The subsidy to the Geithner Funds is a real problem.
If both (a) and (b) applied the Geithner Fund MUST save the government money – so the subsidy is irrelevant.
Possibly valid to disagree with (b).
Krugman’s Dispair is a condition not caused by whether the subsidy through the Geithner Funds is a real problem. Krugman’s question is temporal and political: (A) does the Geithner Fund move us to a conditional state where insolvent banks (that happen to have huge chunks of banking marketshare) are solvent and (lending at some undefined future optimal lending rate) faster than a strict nationalization plan? And (B) after shooting the Geithner Funds bullet, will political leaders be unwilling to do the “right thing” wrt to nationalization?
Krugman’s Dispair does have another component: the subsidy goes to the wrong people. It rewards the failures at banks that made bad risk decisions
Where is Krugman’s conscience? NOW he’s for weeping and gnashing of teeth?
Banks always take risks. Banks are always insolvent. That’s why they are special. They don’t get enough bond investment with date-certain maturity. Why are those the people we want to harass? The real-estate bubble was largely beyond their ken or control.
He’s not advocating free banking, as far as I know.
Banks own houses. When house prices go down, banks lose money.
Losses can only be reduced by people making house payments. This requires renegotiation. Otherwise, we are just shuffling the losses around.
Did I mention banks own houses? The government has been promoting home borrowship for years and calling it home ownership. Now that the worst borrowers with the least ownership realized they are borrowers and not lenders they are returning what they’ve borrowed. Nice neighbors!
There is a way to address this. Renegotiate to longer-term mortgages. People can make lower payments and there will be no up-front losses on the loan portfolio. This will allow banks to find the notes and unslice and dice them. This will additionally select for residents over speculators. Residents derive additional benefits over purely monetary calculations.
What about the actual villains? The purpose of lending rules is to ferret out who can make payments. If residents can renegotiate and make their payments, they are making the payments, so no harm, no foul. I don’t think they will forget the trauma soon. Reduce the pool of people that the government can go after for fraud to the speculators and the mortgage brokers that enabled them.
A) is true.
B) may be true in the “actual”, but isn’t that half the problem?
C) is true, if we do not endorse or support B.
What is the downside risk of fighting B? What is the upside?
Since the banks are so tragically misunderstood according to Tyler, I would expect no less than a significant portion of his net-worth is currently invested in the common equity of Citigroup, Wells Fargo, Bank of America, and J.P. Morgan. How much of it is actually there?
It is easy to rationalize your politics into your economics when it costs you nothing. But with unemployment still rising, incomes still stagnant, and home prices still falling rapidly (they need to fall more than 10% in many areas to get back anywhere close to affordable via income) I am not convinced that enough banks will be solvent (without government capital) that the normal consolidation process will be effective without outlandish subsidies.
STR,
As long as the banks are being forced to follow the Basel II
capital requirements, and Sheila Bair thinks those requirements
should be increased, then it is reasonable to loosen up on the
mark to marketing rule, which is presumably what you are
referring to, although it is possible that this was done in a
bad way.
But, the previous situation was clearly making things worse,
forcing banks to sell off assets to raise capital, thus further
driving down the value of those assets and pushing other banks
to have to sell off assets to…
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