Monday 06 April 2009
Treasury Secretary Timothy Geithner wants to have the government lend up to a trillion dollars to hedge funds, private equity, funds and the banks themselves to clear their books of toxic assets. The plan implies a substantial subsidy to the banks. It is likely to result in the disposal of these assets at far above market value, with the government picking up the losses.
As much as we all want to help out the Wall Street bankers in their hour of need, taxpayers may reasonably ask whether this is the best use of our money. After all, the $1 trillion that is being set aside for this latest TARP variation is equal to 300 million SCHIP kid years. Congress has had heated debates over sums that were a small fraction of this size. To give another useful measuring stick, the Geithner plan could fund 1 million of the Woodstock museums that were the main prop of Senator McCain's presidential campaign.
The core problem is that many of our big banks are bankrupt. If they had to acknowledge the losses that they have incurred on their housing related loans (and increasing their loans in commercial real estate) Citigroup, Bank of America, and many other large banks would be insolvent. Thus far, they have avoided reality by keeping these loans on their books at inflated prices.
There is an alternative. Rather than using government money to keep them alive, we could force the banks to go through a type of managed bankruptcy process like the one that is currently being proposed for General Motors and Chrysler.
Geithner has supposedly ruled out the bankruptcy option because when he, along with Henry Paulson and Ben Bernanke, tried letting Lehman Brothers go under last fall, it didn't turn out very well. Of course, it is not necessary to go the route of an uncontrolled bankruptcy that Geithner and Co. pursued with Lehman.
The prospect of even an arranged bankruptcy of a major bank will undoubtedly shake up markets, but many safeguards have been put in place since the Lehman collapse. If the stock market goes down for a few weeks or months, who cares? Running the economy to serve the stock market is a sure recipe for disaster; if President Obama fixes the economy, the stock market will do just fine in the long run.
Anyhow, the Geithner crew insists that there are no alternatives to his plan; we have to just keep giving hundreds of billions of dollars to the banks. Perhaps Geithner is right. But before we throw such huge sums away, further enriching the bankers who wrecked the economy, maybe we should get a second opinion.
Suppose that Congress appropriated a modest chunk of money to have independent economists put together teams to construct alternative plans. Why not give M.I.T. professor Simon Johnson, a former chief economist of the IMF, $5 million to hire a crew to outline his preferred path? Congress could give Joe Stiglitz, a Nobel Prize winner and one-time chief economist to President Clinton, who is also a harsh critic of the Geithner plan, a similar sum to put together his own team.
These economists could develop their best plans and put them out for public consumption. Geithner's crew can then tell us why their plans are unworkable and we must instead hand over the money to banks.
Given how much money Geithner wants to spend - putting it in the hands of the folks that brought on this economic crisis - it would seem appropriate to first examine all the alternatives. After all, we could find out what our options are in this case for the price of just a few A.I.G. executive bonuses. That has to be a good deal in anyone's book.