My question about the Geithner bailout plan

Posted By Daniel W. Drezner Tuesday, March 24, 2009 - 12:35 AM Share

The markets loved it, but, if you think about it, part of the reason there's been a financial meltdown is that the markets has the ability to misprice a lot of stuff, so let's discount this data point juuust a wee bit.

Who's right?

I'm not sure, and I'm really jet-lagged. However, this is important, here's my quick and dirty and partially-informed take:

Krugman's position is the statement that Geithner's plan is just a warmed-over version of Paulson's initial TARP plan to buy toxic assets. I don't disagree with that assessment. By implication, however, Krugman thinks that since so may economists thought this idea was bad back in September, it is therefore bad now.

If memory serves, however, the reason for this economic consensus at the time was the idea that it would take too long for this buyback program to work. With credit markets near frozen, the idea of injecting the banks with capital was thought to be a better and quicker idea.

Fast forward six months. While the bottom has fallen out of a lot of markets, the credit crunch has eased. There is now time to execute some version of the original TARP idea. Furthermore, the people doing the implementing have more political legitimacy than the lame-duck Bush administration.

In other words, I think this plan has a much better chance of succeeding than the original TARP plan. But I'm nowhere near sure of this.

Comments on the intrinsic merits of the plan are very much appreciated.

EXPLORE:ECONOMICS, FINANCIAL MELTDOWN, OBAMA

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VLADIMIR

2:47 AM ET

March 24, 2009

The trick to get the plan to

The trick to get the plan to work it seems is for investors to purchase assets at close enough to current book value and in sufficient quantities to leave the banks with a clean bill of health and only a small level of capital insufficiency thus making it possible to raise new capital in the markets at reasonable cost. I doubt any of this can be accomplished without significant additional capital injections from the government.

BLUE13326

6:13 AM ET

March 24, 2009

It makes the same logical

It makes the same logical sense that it did back in September when it was the Bush/Paulson plan, because it gets these off the banks' balance sheets. It offers the best hope of getting banks out of this downward spiral of capital requirements. The only real alternative would be for the housing market to pick up; because more and more of these assets would be downgraded, reducing the banks' regulatory capital, forcing sales into illiquid markets. But, the Brown/UK plan that was actually adopted made a lot of sense, too, and that didn't work out so well.

An alternative might be to loosen the regulatory requirements for banks in the maximum percent of risk impaired assets, or to force the ratings agencies to change the way they rate these instruments. A lot of the problem can be traced to the ratings agencies' decision to rate these using a corporate bond analogy (and the banks were all too happy to get them to do it this way). But these assets are not like corporate bonds. There's obviously no appetite to loosen regulation, however.

The conspiracy theorist in me wonders why the original plan wasn't adopted; maybe you're right that an unpopular administration couldn't put up with all this taxpayer risk, but I also wonder if it might have been if we hadn't had a Treasury Secretary from Goldman.

ARTHUR

11:12 PM ET

March 24, 2009

Qui bono?

Again, qui bono?

Whether it works or not, the main beneficiaries will be a bunch of wealthy people in financial centers, and the secondary beneficiaries will be the people who depend on them. (Some of those are "regular folks," mostly on the coast.)

Whether it works or not, expect ongoing political firestorms in the heartland, which has to help pay the bills without getting much benefit.