In the Tanks: A Debate on the Financial Rescue Plan
The Post partnered with Andres Martinez of the New America Foundation to host an online dialogue with Washington think tankers on the administration's announced strategy to stabilize the nation's financial system.
Andres Martinez (New America): The markets are underwhelmed by Treasury Secretary Tim Geithner's plan. But the policy response to the nation's credit freeze and the need to "bail out" the overleveraged financial sector is precisely the kind of subject that gets our adrenaline flowing at think tanks. So what do we think? Any surprises here? Is the administration doing enough (or too much) to fix the problem? These aren't easy questions, and I'm still not entirely clear on the overriding narrative of Geithner's plan. I can explain the stimulus to my four-year-old son, but I'd be hard pressed to explain the financial rescue to him -- or anyone else.
Dan Mitchell (Cato Institute): Geithner's bailout proposal is very disappointing. The economy is in a ditch in large part because of misguided government intervention. The best option would be to allow markets to operate. Unfortunately, Geithner has decided to continue the failed Paulson policy of hindering markets. He wants to prop up bankrupt institutions. He wants to hinder the natural and necessary reallocation of resources out of weak sectors of the economy (in this case, housing and finance). And he wants to create a "public-private" enterprise that almost surely will be a vehicle for ongoing -- perhaps permanent -- interference in private markets.
John Irons (Economic Policy Institute): A couple interesting nuggets: I think the most intriguing part of the plan is the use of public-private partnerships to buy troubled assets. Looks like this may be an effort both to provide banks with capital support and to take various kinds of assets (including mortgage-backed securities) off the banks' books. Given that the private market does not think well of these assets, it's hard to predict what the treasury will have to do to lure private money back into the market -- and at what cost. I'm looking forward to seeing the details.
Andres Martinez (New America): I'm intrigued by your use of the word "intriguing" in characterizing the private-public partnership to buy up toxic assets. It would have been a lot tidier to create a government "bad bank" to cleanse the banks' balance sheets, no? Great if we taxpayers can lure private investors to invest in these toxic assets, but are we left with crippling uncertainty as we wait for that question to be answered?
Adam Posen (Peterson Institute for International Economics): Yes, we all want the toxic assets to be sold eventually to the private sector, and we all want the government directing bank loans as little as possible. Is it realistic, however, to think that bribing the private actors who currently cannot put a price on those assets to buy them, and giving more funding and guarantees to current bank management and shareholders, will lead to good results? Or is this a replay of Freddie/Fannie: gains go to the private interests, losses go to the taxpayers and the management plays with house money? The Japan and the U.S. Savings and Loan experiences suggest that's what will happen.
David John (Heritage Foundation): I agree about the public-private partnership. It will be very tricky to set up, and no matter what, will not have any real effect for some time. A guarantee (to limit the banks' ultimate losses) would be faster, easier, and make much more operational sense. My favorite part of Geithner's proposal is the idea of finally going into these $100-billion-plus asset banks and getting more information about their portfolios. That would provide a better basis for determining need than the emergency-based system used so far. However, explaining it to my child will be a challenge that I'll duck for now -- and mine is five!
Douglas Elliott (Brookings Institution): A five-page paper containing my analysis is now available here.
Andres Martinez (New America): Thanks for sharing, Doug. Who says think tankers can't handle tight deadlines! What is the one-sentence takeaway you'll share a cocktail parties?
Douglas Elliott (Brookings): It's a run-on sentence, but here goes: It's great that they recognize the need to keep adding capital to the system, but it's disappointing that they've gone with a vague and likely very complex public/private partnership rather than just providing a guarantee of the floor value of the toxic assets to the banks who own them.
John Irons (EPI): The vexing question in all this is how to value the toxic assets. A pure government "bad bank" would have to determine the prices somehow (reverse auction or similar) that would be difficult to implement and I suspect could be subject to a fair amount of gaming by current owners.
Dan Mitchell (Cato): Politicians and bureaucrats do not have the competence to value assets. Investors are sitting on the sidelines to some extent because nobody knows what new interventions will take place. Comforted by the prospect of more taxpayer money, financial institutions have little reason to sell assets. Instead, they have decided that the most "profitable" strategy is lobbying in hopes of getting as much taxpayer money as possible with as few strings as possible.
John Irons (EPI): The Federal Reserve also brings some goodies to the table. The Fed's balance sheet is a powerful tool for providing stability, and the Fed has considerable expertise in assessing banks and the financial system as a whole. On the down side, the Fed has traditionally been, shall we say, a bit opaque on transparency issues.
Andrew Jakabovics (Center for American Progress): As always, the devil will be in the details. I think the repetition of taxpayer protection as a core principle is important, but I don't know how that will translate into implementation. We need to keep a close eye on "range of structures" they are considering for the public/private investment fund. That may be the hardest place to ensure taxpayers get a good return on their assets. And my major concern is housing. I know the details of that part of the plan are still forthcoming, so I'll reserve final judgment until the terms are released.
David John (Heritage): I very much agree. Overall, the TARP II plan lacks most of the crucial details that are necessary for a proper evaluation. After so much hype and anticipation, they would have done better to hold an announcement until details were worked out. The market reaction shows that this was a crucial error on Treasury's part.