Paul Krugman http://krugman.blogs.nytimes.com/2009/01/30/the-geithner-put/
The Geithner put People tend to forget this, but we were on the edge of a major banking crisis in the early 90s. it wasn’t just the S&Ls; commercial banks were in trouble too, largely because of big losses on commercial real estate. And I remember a conversation I had back then with economists at the New York Fed, one of whom declared that the only reason Citibank (as it then was) had a positive market value was the “FDIC put.” That is, part of the Citi’s downside was in fact covered by taxpayers, who were guaranteeing deposits whatever happened, while all of the upside belonged to the stockholders. As it turned out, a combination of low interest rates and then the great Clinton-era boom meant that this put option was never exercised. But that episode came back to me as I parse stories about the Obama administration’s apparent emerging plan for bank rescue. If the reports are right, the plan is to buy up some of the troubled assets — but only those that have already been written way down. The Obama team doesn’t want to buy up the assets that haven’t been written down. For the rest, the Feds will offer a guarantee protecting the banks against large losses. As best I understand it, the reason not to buy up assets that haven’t been written down is that paying book value would be an obviously bad deal for taxpayers, while paying a low price would devastate banks’ reported capital, a process sometimes known as “recognizing reality.” So the really important part of the bailout will involve providing what we have to call the “Geithner put”: taxpayers will assume a large part of the downside risk. This might — might — work out OK, just as the FDIC put of the early 90s did. But let’s be clear what this is: it is lemon socialism, pure and simple: socialized losses, privatized profits. Is this really the best we can do? On 1 feb, 16:21, "[email protected]" <[email protected]> wrote: > My comment: Unfortunately this issue is too serious to let it pass > without any comment. > > Besides what prof. Stiglitz told, and I agree. There is a deeper point > that I want to point out. The overall perspective of economics and its > projection into actual economic policies. > > Until prof. Friedman, economics had many legs (fiscal, labour, etc.) > but two main legs in particular one is financials that cares on how > financial means (money, credit, liquidity, etc.) move, rise or fall > and the second one is economy itself or how, who, etc. real wealth is > created. Since prof. Friedman and monetarism, financials took the > driver seat in US government and some other governments around the > world. Even, US universities taught that financials is enough to drive > an economy, while who, how, what, etc. is decided by free market > agents. In 2008 the world has realised that it is not true. > > But we still have a problem. Those who do not know anything but > financials. > > I have to recap about this crisis. Despite the real crisis is rooted > into the real economy (lack of savings in US economy that produced > lack of fund into the banking system and mismatch between US > production and global demand that bring foreign deficits), the > symptoms were 1) banking crisis beacuse mortgage crash, 2) on top of > the banking crisis, crisis of the whole financial system. Whisle the > crisis was in the financial arena, most financials were able to > predict, to handle, to advise, etc. it was their scope of knowledge. > > But since July-August 2008, it is not mainly a financial crisis, it is > an economic crisis that has embeded a financial crisis, and deeper it > has embedded a banking crisis. Very few American economists are > skilled on economic policies, their skills are just financials. > Unfortunately the current secretary of the treasure, Mr.Geithner, is > one of them. Fortunately prof. Stiglitz knows how to walk with two > legs, economy and financials. > > Financial solutions are waste of time and funds. This crisis will be > fixed only through economic means. In that sense, the stimulous > package that was anounced several months ago points at the right > direction: to create wealth from the bottom. Although probably it > needs more funds that the first budget. The bad bank policy points > once again at the wrong direction, to withdraw funds from the real > economy (what Americans call main street) to carry them to the banking > system (what Americans call Wall Street), that withdrawal will hurt > the stimulous policy. > > The banking system will not recover even if they put trillions and > trillions into them. They will not leand money, because the only big > real AAA customer is the Federal budget (and it is AAA because we want > that it is), without lending they will not make profits, and without > profits the system is not sustainable. The bad bank just means to > start a new housing bubble from scratch, again. And again, a new > crisis in the near future. > > Bet hard on the stimulous package, as hard as required, even harder > than today if necesary. There is the true way out. > > Peace and best wishes. > > Xi > > http://www.bloomberg.com/apps/news?pid=20601087&sid=a.madyfHZeBs&refe... --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "World-thread" group. 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