More fundamentally then the question of whether the Bad Asset Repurchase program will work was the question answered today: Tim Geithner's not going anywhere, because, if nothing else, Wall Street roared their approval.
Sure, some of today's stock rally was about home sales ticking up (I'm more heartened that in the new housing start numbers from a couple of weeks ago indicated an increase in apartment construction), but the big reaction was obvious: Geithner's plan may or may not work financially, but it was aces in buying him breathing room.
Honestly, I don't think Geithner's the "massive fail" some have made him out to be; like Hank Paulson,even more than Paulson in some ways, he's just the guy in the wrong job at the wrong moment. Remember the alternative, at first, was Larry Summers. And right now, almost everyone admits that losing Geithner means no one as Treasury Secretary. Also, not an option.
So breathing room... I can't say I'm opposed; taking some of the light and heat off of Geithner might give everyone a chance to reassess where we are and what to do next. The problem of course is... that asset sale plan is lousy. And he may just get away with it.
Lots of people have thrown up their hands at trying to make sense of this plan; I think that's a mistake, because the question of how to handle the bad mortgage securities is the very heart of any chance we have at recovery. Geithner's plan - which really hasn't changed much over the time he's taken crafting it - is basically what Hank Paulson originally proposed with TARP: buy up the bad paper from the banks... and then do something with it.
The problem with Paulson's plan, and why it failed, was immediately obvious: no one knew what the bonds were worth, and Paulson basically proposed paying something close to 100 cents on the dollar for them. Whatever they were worth... it wasn't face value.
Geithner's plan isn't clear on price, but it basically fudges the equation: private investors will "bid" for the paper... but their bids will be supplemented by an enormous subsidy of government funds, roughly 11 to 1 dollars of investor money. And the FDIC, in its role as regulator, will oversee valuations of "packages" put together by banks - probably putting some not so bad paper in with the worst to reduce risk and exposure.
A lot of people have glommed onto complaining about the subsidies, the latest example of "government money" being thrown at a problem. I think this is a dead end for progressives especially, given that "throw money at the problem" is pretty much the definition of a government solution... and generally, we like government solutions over the alternative.
No, the problem is something bigger than price or subsidy: the real question is what Geithner's trying to achieve (and we should, probably lump Larry Summers in here too... because he's clearly playing an architect role in all of this). The problem here is the same as itwas with Paulson, one which has never been resolved: it's the idea that somehow, some way, the mortgage paper is just seen as worthless now... but later, when we recover, it will be worth something again. This fallacy is the one I've been discussing since November at least: it's pretending, yet again, that we can somehow, someday, return to our old ways, that what we are xperiencing now is not a wholesale end to our debt culture... but a blip we can overcome.
Geithner made that much - and little else - clear at his press conference today, talking, yet again, about "restoring credit markets" and jumpstarting the lending machine. Many people have assumed "restoring credit markets" means making loans; in fact, it seems clear that Geithner means restarting the trade in credit-backed securities, which is really how we got to the mess we're in more than any other factor. But even "restarting lending", as I've said repeatedly, is a fantasy: banks are lending... they're just not lending crazy, and even if they wanted to... people are already struggling wih the hangover of massive debts - mortgages, car loans, credit cards, sudent loans - and that's a cycle we're nowhere through yet. Geithner and Summers - and Cristina Romer (who surely needs some coaching on not trying to sound like a cheery Austrian governess while trying to minimize an economic crisis) - all seem convinced, still, that once this is over, we'll just get back to our old ways. That's what Wall Street liked most today, and it's what why, most clearly, Obama's economic team may not be the team to get us out of this mess; if they can't see the prblem, how the hell can they fix it?
Because the reality here is what almost no one mentioned all day - that most of the paper in question is probably worthless, that selling it, at any price, really just reocates a problem rather than fixes it - what really needs to happen is someone needs to take apart these bonds, examine the underlying assets (i.e. the mortgages) and figure out how to deal with them. Oherwise, rather than bailing out Citibank and Bank of America, we'll be bailing out BlackRock and Pimco, two of the firms planning to buy up the distressed debt.
More than anything, today was a show designed to rehabilitate the Obama Administration - and that rehab comes at a price, well, above rubies (or, just as accurately... well above rubies). Geithner's virtues - especially in financial markets - needed the shoring up; but our economy probably can't survive the expense. And it may not have to - I'm still unconvinced, despite the hand-raising of firms willing to buy, that the banks and the buyers can find a price that doesn't leave the banks eating losses over 50% (a reality the banks so far have said they can't accept), even with generous government allowances. Deal, or no deal... so far we seem right back where we started.
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