THE WISE ECONOMISTS (Cont'd)

In the last blog I discussed some views
that are shared by Paul Krugman, Joseph
Stiglitz and Simon Johnson regarding the
Geinther plan for restoring the banks. Here I
am continuing to quote from Johnson's fine
article in The Atlantic, "The Quiet Coup:"
"At the root of the banks' problems are the
large losses they have undoubtedly taken on
their securities and loan portfolios. But they
don't want to recognize the full extent of their
losses, because that would likely expose them
as insolvent." (Let me insert here that Krugman
calls these banks "zombies" [dead men walking].)
And these include some of the nation's largest
banks. Back to Johnson: "So they talk down the
problem, and ask for handouts that aren't enough
to make them healthy (again, they can't reveal the
size of the handouts that would be necessary for
that), but are enough to keep them upright a little
longer. This behaviour is corrosive: unhealthy
banks either don't lend (hoarding money to shore
up reserves) or they make desperate gambles on
high-risk loans and investments that could pay off
big, but probably won't pay off at all. In either case,
the economy suffers further, and as it does, bank
assets themselves continue to deteriorate -- crea-
ting a highly destructive vicious cycle."

"To break this cycle," says Johnson, "the goverment
must force the banks to acknowledge the scale of
their problems. As the IMF understands (and as the
U.S. government itself insisted to multiple emerging
market countries in the past), the most direct way to
do this is nationalization. Instead, Treasury is trying
to negotiate bailouts bank by bank, and behaving as
if the banks hold all the cards -- contorting the terms
of each deal to minimize government ownership
while forswearing government influence over bank
strategy or operations. Under these conditions,
cleaning up bank balance sheets is impossible."

Joseph Stiglitz, in a NYT op. ed. today expresses
many of the same opinions we have heard here
from Simon Johnson. In a masterful explanation
of the actual $ and non-sense figures in the Geith-
ner plan, he writes: "The main problem is not a lack
of liquidity. If it were, then a far simpler program
would work: just provide the funds without loan
guaranties. The real issue is that the banks made
bad loans in a bubble and were highly leveraged.
They have lost their capital, and the capital has to
be replaced. Paying fair market values for the assets
will not work. Only by overpaying for the assets will
the banks be adequately recapitalized. But overpay-
ing for the assets simply shifts the losses to the gov-
ernment. In other words, the Geithner plan works
only if and when the taxpayer loses big time."

Stiglitz agrees with Johnson and Krugman that the
quickest, cheapest, and most efficient way to get
these zombie banks going again is to nationalize
them (temporarily) to clean up the mess. Regard-
ing this, he writes: "Some Americans are afraid that
the government might temporarily 'nationalize'
the banks, but that option would be preferable to
the Geithner plan. After all, the F.D.I.C. has taken
control of failing banks before, and done it well. It
has even nationalized large institutions like Conti-
nental Illinois (taken over in 1984, back in private
hands a few years later), and Washington Mutual
(seized last September, and immediately resold)."

But, says Stiglitz, "What the Obama administration
is doing is far worse than nationalization: it is er-
satz capitalism, privatizing of gains and the sociali-
zing of losses. It is a 'partnership' in which one
partner robs the other. And such partnerships --
with the private sector in control -- have perverse
incentives, worse even than the ones that got us
into this mess."

"So what is the appeal of a proposal like this," he
asks? Perhaps it's the kind of Rube Goldberg de-
vice that Wall Street loves -- clever, complex and
nontransparent, allowing huge transfers of wealth
to the financial markets. It has allowed the admini-
stration to avoid going back to Congress to ask for
the money needed to fix our banks, and it provided
a way to avoid nationalization. But we are already
suffering from a crisis in confidence. When the high
costs of the administration's plan become apparent,
confidence will be eroded further. At that point the
task of recreating a vibrant financial sector, and re-
suscitating the economy, will be even harder."

It is easy to see why Wall Street likes the Geithner
plan, and why the stock market has responded as
well. Dean Baker writes in the Huffington Post
(3/31/09): "Oh, by the way, some people will get
very rich off the Geithner plan. Some hedge fund
and equity fund managers could make hundreds
of millions or even billions off the Geithner plan.
And under current law, they will pay a lower tax
rate on this money than a schoolteacher or fire-
fighter. Are you sold yet? One other outcome of
the Geithner plan is that the folks who bankrupted
their banks and wrecked the economy will be able
to continue to earn multi-million dollar salaries.
Of course this is necessary, because who else has
the skills to run these banks, other than the people
who drove them into bankruptcy?"

Let me know what you think!

Correct e-mail: jgoodwin004@centurytel.net