Wednesday, February 11, 2009
LET NO ONE underestimate the task before Treasury Secretary Timothy F. Geithner. The U.S. financial system is facing a once-in-a-century crisis, the essence of which is the banks' accumulation of capital-destroying bad assets. The solution is to clear these assets from bank balance sheets so that financial institutions can again raise private funds and resume normal lending. But given the lack of a market for the assets, it's not easy for government or anyone else to buy them without conferring a windfall on the banks. This technical challenge is magnified by a political one: No matter how necessary and defensible the government's decisions, they can always be attacked as a taxpayer rip-off, a bailout of Wall Street, etc., etc. These dilemmas have plagued the federal response to the financial crisis since it began more than a year ago.
Judging by the policy Mr. Geithner unveiled yesterday, the Obama administration does not yet have a definitive resolution. To be sure, in two respects, Mr. Geithner's suggestions represented potential improvement. First, he called for a substantial expansion, underwritten by the Treasury, of the Federal Reserve's Term Asset-Backed Securities Loan Facility, so that it can provide liquidity to the markets for student, auto, consumer and commercial real estate loans. Second, Mr. Geithner proposed a "stress test" of large banks, which could provide new information as to which of them are undercapitalized and need government support, a merger or -- in the worst cases -- shutting down.
But, at its heart, the Geithner initiative was a work in progress -- more a concept than a plan, really. On the critical issue of removing toxic assets from bank balance sheets, the secretary surprised nearly everyone by eschewing all three of the ideas that had reportedly been circulating within the administration: nationalization, creation of a "bad bank" or a general government guarantee. Instead, he proposed a public-private investment fund, which would use government money to leverage private purchases of the assets. Private companies, not the government, would then manage those assets. Whether this would be done through direct federal loans to investors or some other means, Mr. Geithner did not say. That and other details, such as the method by which the government, banks and private capital would set asset prices, remain to be worked out -- based in part on "input from market participants and the public," Mr. Geithner said. The total price tag could be between $500 billion and $1 trillion, with the public and private shares also not yet determined.
Perhaps more discussion of this much-debated subject will yield a perfectly calibrated solution. More likely, any proposal that emerges will still contain some form of subsidy for banks, those who buy their troubled assets, or both. For understandable policy reasons, the Obama administration wants to keep that inevitable subsidy to a minimum. Yesterday's unfinished product, however, seemed to reflect an additional political imperative: keeping the taxpayer cost of cleaning up the banks as obscure as possible for as long as possible. This was achieved, but at a cost: The decisive fix that the markets demand was again postponed. We hope it was not also achieved at the expense of doing something that might eventually work. Based on what we heard yesterday, it is simply too early to tell.