Tuesday, February 10, 2009

Here is how economists and others reacted to Mr. Geithner’s speech

From the NY Times:

"
Reactions to Geithner’s Speech

Updated 3:33 p.m. with more reaction

In a press conference in Washington on Tuesday, the Treasury secretary, Timothy F. Geithner, announced the government’s new plan of action to rescue the banking system.

Here is how economists and others reacted to Mr. Geithner’s speech:

Brian Bethune, IHS Global Insight: “The bottom line from the Geithner speech is that it was too general, and it lacked the specifics needed to it to be credible - the speech and its preamble had too many political overtones that did not set the stage appropriately for essentially a key communication that was directed to mainly a technical audience from a key administration technocrat.”

Nassim Taleb, New York University Polytechnic Institute: “This plan is coming from those who missed the crisis and still don’t understand what’s going on. It does not address the fundamental problem we are facing: the economic system is fragile and needs what I call “robustification to Black Swans” through deleveraging, a transition into what I call Capitalism 2.0. I don’t understand 1) why we need to force people to borrow more when, if anything, we need to de-leverage by turning debt into equity or restructuring existing debt — it is like giving more cocaine to an addict experiencing withdrawal symptoms and calling it a “solution”; 2) it does not do what to me is the essential need of the system: nationalize the banks and snatch control from the bankers because they have vicious incentives to take risks at society’s expense — and proved it with the first plan. In short: it has already failed.”

Daniel Alpert, Westwood Capital, LLC: “There is much to be admired in the Financial Stability Plan unveiled by Treasury Secretary Tim Geithner in his presentation this morning. We particularly applaud the emphasis on the stress testing of large banks to determine their ability to survive in a deteriorating economic environment. Nevertheless, we are a bit incredulous as to why the Secretary (and, it is apparent from insider reports, that his views prevailed on this score) placed such heavy emphasis on protecting the economic stakes of existing holders of the common shares of troubled banks when the government will still be required to inject billions more to restore capitalization to large systemically critical institutions.”

Douglas Elliott, The Brookings Institution: “The bad bank, which will be fleshed out over the next several weeks, will be extremely tricky to design effectively. At best, it will be modestly inferior to the solution of providing a guaranteed floor value for toxic assets without requiring banks to sell them to gain the protection. At worst, the plan may fizzle by failing to achieve a large volume of purchases or may prove considerably more expensive for taxpayers than anticipated. On the positive side, continuing to offer substantial capital injections to banks, despite the intense political unpopularity of those done under the Bush Administration, shows a measure of political courage.”

Jan Hatzius, Goldman Sachs U.S. Economic Research: “As expected, the Treasury’s financial rescue plan will work within the constraints of existing TARP funding (of which about $350bn remains), attempting to catalyze private sector funds to purchase bad assets and restart the securitization process. However, the speech and accompanying fact sheet leave open many questions about the timing of these interventions and the terms of asset purchases and recapitalization. Much of the program clearly remains to be worked out over the coming weeks and months.”

Robert Reich, University of California, Berkeley: “The Treasury doesn’t have the entire plan worked out yet, and also needs some wiggle room in case certain aspects prove unworkable. Too much detail can also attract the attention of critics who will inevitably find fault or raise awkward questions. Remember: Nothing has ever been tried on this scale before. But…[t]he public wants specificity in terms of where the second tranche of TARP’s $350 billion is going, and exactly how it will translate into more loans and more help for distressed homeowners — and will surely demand more specificity if Geithner comes back for additional authorization. More to the point, investors (whoever they are) need lots of specificity before they’re going to put up a single dollar, no matter how much of their downside risk is assumed by the government.”

Mark Gertler, New York University: “It’s first important to recognize that Geithner had to choose from a set of highly imperfect options: There is no magic bullet. With this in mind I think the general thrust of program is in the right direction. From the experience of the last few months we have learned that the way out of this crisis is ultimately going to require cleaning toxic assets off bank balance sheets. The main obstacle to doing so is finding a way to price the assets. The proposed the joint public/private venture is probably the best way to attack this problem. We don’t yet have the full details of how this will work, but I expect we will hear in the next weeks.”

Peter Schiff, Euro Pacific Capital: “Perhaps the centerpiece of today’s announcement is the commitment up to $1 trillion to revivify the collapsed market for securitized debt that previously allowed unprecedented levels of lending in the home, auto, student, and credit card sectors. Geithner makes the false assumption securitization is a prerequisite for healthy markets. Our nation’s short history with widely securitized debt has simply shown that the process can lead to massive mispricing of assets and risk. But, in the worldview of Geithner and his fellow economists, credit, rather than savings, is [the] central figure in the economic equation. In his mind, anything that eases the process of lending is an end in itself. In so doing this plan guarantees that the U.S. economy will be pushed farther and farther out on a leveraged limb, until no amount of market medicine can prevent a total economic collapse.”




Me:

“2) it does not do what to me is the essential need of the system: nationalize the banks and snatch control from the bankers because they have vicious incentives to take risks at society’s expense — and proved it with the first plan. In short: it has already failed.”

At least one person gets it. We need to exert real moral hazard by seizing these banks. It’s what the banks fear, as is shown by the lengths that are being taken to avoid it. Without that, this plan goes nowhere except to the taxpayers wallets, where it will deposit huge losses from the banks. What a pity.

— Don the libertarian Democrat

No comments: