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| Home Front Economy |
| The Big Dither |
| 2009-03-06 |
| By PAUL KRUGMAN You know things are bad when Krugman starts to be critical of the Administration. Nah, they just want Bambi to channel his inner Lenin more productively ... Last month, in his big speech to Congress, President Obama argued for bold steps to fix Americas dysfunctional banks. "While the cost of action will be great," he declared, "I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade." Many analysts agree. But among people I talk to theres a growing sense of frustration, even panic, over Mr. Obamas failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern. Heres how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators. Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again. Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as "toxic waste," are really worth much more than anyone is actually willing to pay for them -- and that if these assets were properly priced, all our troubles would go away. Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the "basic inherent economic value" of troubled assets and the "artificially depressed value" that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think theyre worth much, much more. And they would be if you'd suspend the 'mark-to-market' rule and let banks and investors carry them at their previous value for a while. They could then revalue and sell/buy them in the market at prices closer to what they were worth a year or two ago. And the governments job, he declared, is to "provide the financing to help get those markets working," pushing the price of toxic waste up to where it ought to be. Whats more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions. Earlier this week, Ben Bernanke, the Federal Reserve chairman, was asked about the problem of "zombies" -- financial institutions that are effectively bankrupt but are being kept alive by government aid. "I dont know of any large zombie institutions in the U.S. financial system," he declared, and went on to specifically deny that A.I.G. -- A.I.G.! -- is a zombie. This is the same A.I.G. that, unable to honor its promises to pay off other financial institutions when bonds default, has already received $150 billion in aid and just got a commitment for $30 billion more. The truth is that the Bernanke-Geithner plan -- the plan the administration keeps floating, in slightly different versions -- isnt going to fly. Take the plans latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially. But would it be enough to make the banking system healthy? No. Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where theyre needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who dont need or deserve to be rescued. And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit. (Yes, even strong advocates of fiscal stimulus like yours truly worry about red ink.) Realistically, its just not going to happen. So why has this zombie idea -- it keeps being killed, but it keeps coming back -- taken such a powerful grip? The answer, I fear, is that officials still arent willing to face the facts. They dont want to face up to the dire state of major financial institutions because its very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable. But this refusal to face the facts means, in practice, an absence of action. And I share the presidents fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more. The silliest part of all this is that a mortgage cramdown measure will further devalue the assets backed by mortgages so the administration is implementing policies which will make the gap between the theory and the reality even wider. Some adults are required but no-one will take the jobs because they applicants have to answer questions about their taxes. Monty Python??. |
| Posted by:Omoter Speaking for Boskone7794 |
| #12 I'm with NS. MtM is no secret anymore. Nobody is going to get 'suckered' into buying some overpriced crap because it's no longer marked to market. In a market and economy like this, investors are deciding for themsleves what things are worth, they're not trusting anyones word on values. Suspend it for a couple years and see what happens. |
| Posted by: Mike N. 2009-03-06 19:40 |
| #11 Our troubles will not go away if the toxic waste is given an imaginarily high value, either. Way to demolish that straw man. The problem with mark to market is that it has effectively destroyed the ability of anyone to make a market in the "toxic waste" that is an incredible long term opportunity but would result in an immediate short term GAAP loss for any purchaser without creating any tax benefit. Listen to John Allison's presentation to understand how a responsible banker views mark-to-market. A lot of the big banks are truly insolvent, need to be taken out back & shot in the head. Housing is still ridiculously overpriced, even in places like Detroit & Cleveland. Great non-sequitur. Mark to market should be reversed. We've had it for two years. Let's repeal it for two and see what happens. |
| Posted by: Nimble Spemble 2009-03-06 17:35 |
| #10 These declinations are of no consequence. The One's devoted Leibstandarte primary staff will find the right people. There should be no concern, no concern at all. |
| Posted by: Besoeker 2009-03-06 16:52 |
| #9 "Some adults are required but no-one will take the jobs" The adults won't take these jobs because the White House staff studiously ignores whatever they have to say. There are stories about Paul Volker wandering the halls of White House trying to find someone to speak to while the political types make policy decisions without any input from the economic advisors. |
| Posted by: Frozen Al 2009-03-06 16:38 |
| #8 Although mark-to-market is a problem where there is no legitimate market, the whole MTM notion is not the full story. It emanates from FASB157 and applies only to assets held for sale. If a bank makes a loan which it holds on its books to maturity MTM has no relevance. There is the need for annual write down provisioning which is different. So the MTM issue is a bit of a red herring and not fully understood. [See Steve Forbes in the WSJ today - he gets it wrong as well]. But it is legitimate where there is no market - which should be defined as a ready and willing buyer meeting a ready and willing seller. At the moment the only buyers are hedgefunds who want to pay fire sale prices so that doesn't fit the definition. It is a mess and not easily susceptible to a silver bullet. |
| Posted by: Omoter Speaking for Boskone7794 2009-03-06 16:24 |
| #7 Suspending the MTM rule is an even dumber idea than anything the Obamanauts have yet come up with. Our troubles will not go away if the toxic waste is given an imaginarily high value, either. A lot of the big banks are truly insolvent, need to be taken out back & shot in the head. Housing is still ridiculously overpriced, even in places like Detroit & Cleveland. do you really want the people who are in charge now deciding your health concerns? That is on the topic, very much so. I sure don't want the pirates & thieves who have run the world banking system into the ground to deciding to dig their holes even deeper. Sometimes I think chimps could make better decisions than the Best and the Brightest® have done. |
| Posted by: Anguper Hupomosing9418 2009-03-06 16:10 |
| #6 Ebbang, when that happens, your grocery bill will average a grand a week. |
| Posted by: Redneck Jim 2009-03-06 15:28 |
| #5 I don't like the idea of nationalizing the banks even if the arguement could be made to do so because I have zero confidence in who would be the decision makers; Yah, if we're going to have socialism, we need socialism run by someone who's at least tried to run a small business and failed, and knows that things can go astray of your best intentions. All the democrats seem to have in the way of real businessmen are the people who made sweetheart deals based on their personal influence, like Terry McAuliffe or Hillary Clinton. |
| Posted by: Thing From Snowy Mountain 2009-03-06 14:58 |
| #4 Ebbang, after a few days of Zimbob-style inflation your house will easily be worth that million you want. And Zero's working on it. |
| Posted by: Glenmore 2009-03-06 14:04 |
| #3 So Geithner really, really believes the cost of an average home in southern California should be $1 million? Yippee! As soon as he can get me that much for my house I'm outta here. |
| Posted by: Ebbang Uluque6305 2009-03-06 12:50 |
| #2 Its what happens when a peson stands on the fence post of decision and instead of falling on one side or the other, chooses a little of both and falls straight down. I don't like the idea of nationalizing the banks even if the arguement could be made to do so because I have zero confidence in who would be the decision makers; also do you really want the people who are in charge now deciding your health concerns? Back to the topic, why in the world do it with failed banks (ex. nationalize the energy industry under the name Enron) - the only way it would have any confidence with the people is if were successful in the first place before a state takeover - but if they are successful its because they didn't bite into the government apple. |
| Posted by: swksvolFF 2009-03-06 12:39 |
| #1 So basically, Paul Krugman is on track to become Obama's very own Father Conklin - a fanatical election-year supporter who turned on the punative Saviour of the Left because he wasn't leftist enough, fast enough? |
| Posted by: Mitch H. 2009-03-06 11:42 |