THREE ECONOMICS WISE MEN AGREE:

THE GEITHNER PLAN STINKS

Two of the three, Paul Krugman and Joseph Stiglitz
are Nobel Prize winning economists. The third, Simon
Johnson, is an economics prof. at M. I. T. and was, for
several years, head economist for the International
Monetary Fund (IMF). He has written a dynamite
analysis of the bank situation and it's best bet for a
cure in the May, 2009 Atlantic. (I urge you to get it
and read it on the Internet.) It's a masterpiece of
clarity and logic on an arcane but vitally important
subject. Clearly these guys are not light-weights, and
they do offer solutions, contrary to Geithner's charge
that no one has come forward with alternatives to his
plan.

Here's Johnson (from the article cited above): "In a fi-
nancial panic, the government must respond with both
speed and overwhelming force. The root problem is un-
certainty -- in our case, uncertainty about whether the
major banks have sufficient assets to cover their liabilities.
Half measures combined with wishful thinking and a wait-
and-see attitude cannot overcome this uncertainty. And
the longer the response takes, the longer the uncertainty
will stymie the flow of credit, sap consumer confidence,
and cripple the economy -- ultimately making the prob-
lem much harder to solve. Yet the principal characteris-
tics of the government's response to the financial crisis
have been delay, lack of transparency, and an unwilling-
ness to upset the financial sector." (On this, Johnson
echos Krugman and Stiglitz, both of whom have said
repeatedly that foot-dragging at this stage can be fatal.)

" . . . A whole generation of policy makers has been mes-
merized by Wall Street," continues Johnson, "always and
utterly convinced that whatever the banks said was true.
Alan Greenspan's pronouncements in favor of unregulated
financial markets are well known. Yet Greenspan was
hardly alone. This is what Ben Bernanke, the man who
succeeded him, said in 2000: 'The management of market
risk and credit risk has become increasingly sophisticated.
. . . Banking organizations of all sizes have made substantial
strides over the past decades in their ability to measure
and manage risks.'"

"Of course, this was mostly an illusion," Johnson goes on:
"Regulators, legislators, and academics almost all assumed
that the managers of these banks knew what they were
doing. In retrospect, they didn't. AIG's Financial Products
division, for instance, made $2.5 billion in pretax profits in
2005, largely by selling under priced insurance on complex,
poorly understood securities. Often described as 'picking
up nickels in front of a steamroller,' this strategy is profit-
able in ordinary years, and catastrophic in bad ones. As of
last fall, AIG had outstanding insurance on more than $400
billion in securities. To date, the U.S. government, in an
effort to rescue the company, has committed about $180
billion in investments and loans to cover the losses that
AIG's sophisticated risk modeling had said were virtually
impossible."

Noting that the U.S., in its financial ineptitude is coming to
resemble a banana republic in its response to the crisis,
Johnson says: ". . . But there's a deeper and more distur-
bing similarity: elite business interests -- financiers, in the
case of the U.S. -- played a central role in creating the cri-
sis, making ever-larger gambles, with the implicit backing
of the government, until the inevitable collapse. More
alarming, they are now using their influence to prevent
precisely the sorts of reforms that are needed, and fast,
to pull the economy out of its nosedive. The government
seems helpless, or unwilling, to act against them."

Continuing in the same article (it's a long one), Johson
writes under the sub-head "THE WAY OUT" that:
"Looking just at the financial crisis (and leaving aside
some problems from the larger economy), we face at
least two major, interrelated problems. The first is a
desperately ill banking sector that threatens to choke
off any incipient recovery that the fiscal stimulus might
generate. The second is a political balance of power
that gives the financial sector a veto over public policy,
even as that sector loses popular support."

TO BE CONTINUED

My correct e-mail: jgoodwin004@centurytel.net