Slowly but surely we’re seeing a develop consensus emerge among economists on both sides of the aisle that Tim Geithner’s bank bailout plan is a really bad idea.
First we had Paul Krugman come out against the plan on Saturday and again yesterday.
Today, liberal economist James Galbraith writes at The Daily Beast that Geithner’s plan won’t work:
The ultimate objective, and in President Obama’s own words, the test of this plan, is whether it will “get credit flowing again.” (I have dealt with that elsewhere.) Short answer: it won’t. Once rescued, banks will sit quietly on the sidelines, biding their time, until borrowers start to reappear. From 1989 to 1994, that took five years. From 1929 to 195—you get the picture.
So why rescue them? The cost has to fall somewhere: as Milton Friedman, no less, liked to say, there is no free lunch. Let’s not forget: behind all of this are mortgages and derivatives, which were called “liars’ loans,” “neutron loans,” and “toxic waste” by the people who issued them. There was fraud in the inducement, fraud in the conveyance, and fraud in the ratings process. The incumbent top management of the biggest banks either did this or complicit, or complaisant. And they all did very well, while the money was good.
And the reality is, if the sub-prime securities are truly trash, most of the big banks are troubled and some are insolvent. The FDIC should put them through receivership, get clean audits, install new management, and begin the necessary shrinkage of the banking system with the big guys, not the small ones. It should not encumber the banking system we need with failed institutions. And it should not be giving CPR to a market for toxic mortgages that never should have been issued, and certainly never securitized, in the first place.
Nobel Prize winning economist Joseph Stiglitz says the plan will rob American taxpayers:
The U.S. government plan to rid banks of toxic assets will rob American taxpayers by exposing them to too much risk and is unlikely to work as long as the economy remains weak, Nobel Prize-winning economist Joseph Stiglitz said on Tuesday.
“The Geithner plan is very badly flawed,” Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong.
U.S. Treasury Secretary Timothy Geithner’s plan to wipe up to US$1 trillion in bad debt off banks’ balance sheets, unveiled on Monday, offered “perverse incentives”, Stiglitz said.
The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.
“Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”
And, finally, the chief investment strategist for Bank of America thinks that the plan is merely delaying the inevitable:
March 23 (Bloomberg) — Investors should sell bank stocks after they rallied 12 percent today because the Treasury Department’s plan to buy toxic assets won’t stop profits from dropping, Bank of America Corp.’s Richard Bernstein said.
Removing devalued loans and securities from banks’ balance sheets is a short-term solution that will delay the problem’s ultimate solution, which is bank takeovers, Bernstein said. The government won’t be able to inflate the prices banks receive for selling bad assets indefinitely, he added.
“The history of bubbles shows quite well that financial sector consolidation is inevitable,” Bernstein, Bank of America’s chief investment strategist, wrote in a research note. “Financial stocks will be attractive when the government tries to speed up that inevitable process. However, to the contrary, the government continues to attempt to stymie that inevitable consolidation.”
More to come, I’m sure, but the initial reviews are pretty bad.
