Theories of TARP evolution

Via J. Wallace, here is a tableaux of how U.S. banking/bailout proposals have evolved.  And of course the Geithner plan has hardly proven itself overwhelming.  I offer up the following hypotheses, none of which settles the issue for me:

1. U.S. banks have been known to be insolvent for some time and everyone is simply afraid to come out and admit it.

2. The economists offer up coherent plans, but they are then bogged down by the input of competing advisers and Karl Rove-like politicos.

3. The goal of the various plans has been to confuse Congress.

4. The Republicans were just stupid and irresponsible and now the Democrats are smart but they lack experience at the rudder and they need another try to get it right.

5. The Republicans were just stupid and irresponsible and now the Democrats are just stupid and irresponsible.

6. The Obama team is brilliant and we are the silly ones who insist on imposing simple narratives on all policy actions.  Good policy should be difficult to understand.

7. The Democrats made the mistake of setting an artificial deadline and by the time it came around they realized they had nothing so they put up what they had, which wasn't much.

8. We need to re-benchmark our expectations because the world doesn't work as well as we used to think.  What we used to consider "bad policy" is, in reality, compared to the relevant alternatives, "reasonably good policy."

9. U.S. banks are insolvent but we can muddle through if we ignore that fact and let them evolve back into solvency.  What we need is a plan which lacks transparency and Geithner delivered.

10. All of the above.


I vote for #5.

I like #8. We're in a way different set of circumstances now, and we cannot think in terms of the old framework. I also like #11; I don't think there are enough people who actually know what is happening at ground level involved in the shaping of policy/solutions.

a. Government does not solve problems; it subsidizes them.

b. I am not worried about the deficit. It is big enough to take care of itself.

c. The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.

sniff, I miss the Gipper.

i am insolent.

#1 and #5.

longer: "there is no paddle" (in that moment Tyler received enlightenment)

How did we manage to do this back then?

"The Resolution Trust Corporation (RTC) was a United States Government-owned asset management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations (S&Ls) DECLARED INSOLVENT by the Office of Thrift Supervision, as a consequence of the savings and loan crisis of the 1980s....Between 1989 and mid-1995, the Resolution Trust Corporation CLOSED or otherwise resolved 747 thrifts with total assets of $394 billion."

[source: Wikipedia, emphasis: me]

Paraphasing J Paul Getty:

If the US owes the world $500 billion that's the US taxpayer's problem. If the US owes the world $15 trillion, that's the world's problem.†

Maybe the best solution is to run up a massive debt, move to a small, island country with natural resources, plenty of cheap heat & electricity and beautiful women.... oh yeah, that's been tired, sorry Iceland.

I would modify #5 with "blind and stupid".

14. A deliberate attempt to sow fear and panic creates an opportunity to slip the wallet of the distracted onlooker.

a big spike in inflation is all but inevitable.

#1, but we need Pre-Packaged Chapter 11 bankruptcy for ALL the Big Banks with toxic assets they've poisoned themselves with. Bankruptcy, not nationalization.
The 40% share of corporate profits being made in 2006 by the financial industry was Ponzi scheme betting on bets made by betters who didn't know they were betting -- except everybody knew "house prices never go down".

Like not needing newspapers, the internet means the future USA doesn't need nearly as many bankers for taking saver's cash and allocating it to good production / distribution / service businesses.

The growth of 'finance' was huge mal-investment; even worse than over-building residential houses.

The best help for the banks: huge Tax Cuts, now, for people and companies, so that there can be more savings flowing into the banks while at the same time reducing the indebtedness of people and firms.

It's insane that an argument against Tax Cuts is that not enough will be spent, because too much will be saved -- while at the same time arguing for special gov't cash to go into the banks.

If the current plan is unclear (which it is) I think it is reasonable to add Krugman's suggestion as

15. Obama's going to nationalize the banks, but doesn't want too much on the table at once. He cannot disclose a plan to nationalize banks before the stimulus is signed. Geithner's "plan" is an intentional obfuscation in service of political ends; but ultimately it serves the end of nationalization, which the Obama team believes to be the best policy action.

Good grief Man, give up this Obama is brilliant thing. Everytime I hear that crap,I
want to puke.

It's definitely not two - most political economists are just political hacks claiming some objectivity, really.

But I think one and five are poignant. Part of six is correct, though. The Obama team IS brilliant. But when ideology meets intelligence, ideology will win every single time. So it wouldn't matter if Kermit the frog were Obama's head economic adviser.

Amateurs, Amateurs, Amateurs.

It's 8 and 10, among others. The world works very well under inertia. How else could the banks get so deep into the worthless asset bin? What doesn't work well is actual thinking. Now that everyone realizes how deep the thing got, there aren't enough rational experts to dig out.

The banks haven't gone under yet, so why will they go under? It only takes as long as it takes you to walk to your local branch for bank to go under. Banks are always insolvent, except for FDIC insurance, which means that insolvency doesn't matter unless there is a run. There will only be a run if people think they are going under. People will only think they are going under if their assets are overtly marked to zero erroneously rather than using a hold-to-maturity price. I'm not a bank expert, and should investigate this more, but I imagine the problem is also related to the fact that reserves are based on mark-to-market prices so that hinders their ability to lend their way to respectable net present values.

The Obama team IS brilliant.

Niccolo: WHERE'S THE EVIDENCE? Powerlust isn't brilliance.

The Democrats are not just stupid and irresponsible, but also scared.

Reagan knew Washington best: "If it moves, tax it; if it keeps moving, regulate it; if it stops moving, subsidize it." Yaaay, we're doing it again. There's no hope for this town, none at all. I wish someone would just shut Congress down, lock Treasury, and throw away the key. Then the banks can go into Ch. 11 if they have to. We already have a process for sorting this out, we don't need short term improvisation. It's going to take time, and Ch. 11 gives protection while the mortgages and derivatives are sorted into good, bad, and ugly. Then we'll know what the real value of the housing is.

1 and 5 have a certain appeal. I would love to believe 2 except I see how much our profession is flailing right now, so I may have to plump for 11 also.

I think that the problems started with the financial sector and until those problems can be resolved, the spillover effects into the rest of the economy will continue. Among the proposed solutions, I find some real sympathy for letting the Fed become the insurer of last resort - ie, be an FDIC for bank lending. Reducing the risk that a bank will lose its loan to another would help get interbank lending going again. Improved transparency, which I agree is necessary, is always called for and seldom achieved. Being insurer of last resort WOULD set up moral hazard problems, but they would be smaller than the problems we currently face and involve the least amount of direct interference in the market.

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