I found a CNBC story via Tim Duy’s blog that monitors the federal reserve. Duy made the new plan sound horrifyingly senseless. The story is not as horrifying as Duy’s post, but I think it is clear that Summers and Geithner are not sure what to do.
My capsule is that they want to reduce the bailout size due to public disapproval, and the new buzzword is "ring fence". They are gonna get them toxic assets and "ring fence" ’em, you, betcha.
The bad bank idea is out because no one knows what to do with the bad bank after it buys all the doubtful securities. But, if you "ring fence" ’em…. then… well… uh… They are ringed fenced, doncha see?
The story says the ring fence concept has been used with Citibank and BofA. (So, that means it… works… ? …or… not? Story didn’t say.)
Describing the ring fence plan, the story says:
…the government will buy toxic assets below the banks’ "carrying value," which is basically market value, but not at fire-sale levels…
"… it could "trigger an accounting problem for the banks," presumably because the institutions will have to report a loss on the transactions.
The Obama administration is now working on ideas to address that, which might entail a temporary suspension of certain accounting rules. It is unclear what that might be, said the source."
Back to my comments:
Capital injection is minor part of program, government gets convertable preferred stok for any capital it does inject (or also for credit for overpaying for assets -the story wasn’t clear on that point).
So, they are buying these assets at something called a market price, but not at fire sales prices, and these fire sale prices are… what…? The current market price, maybe?
So they are over paying, but not enough to keep the banks from being insolvent.
What the ring fence sounds like to me is the government deciding to overpay slightly less severely than previous plans, with a sensible enough price so that the banks take a loss. But they won’t help recapitalize the banks much. And because the banks must take a loss, they will change the accounting rules (for how long?) to take care of that problem.
OK, look, I am no expert, but this sounds like nonsense to me. We have already heard nonsense from the previous crew, and so far the only results from their efforts was gibberish and lack of results
What is so hard about saying that there as a giant asset pricing bubble, and that a lot of people from top to bottom are having to live with less wealth than they expected? The country needs a giant bankruptcy proceeding, covering several sectors, to write off the bad debts, spread the pain and share the upcoming gain from writing off the bad debts and taking the loss, and staring over. What is so hard about that?
The only hard thing about it that I can think of is that even many Democratic economists simply cannot believe that unregulated and unmonitored, untransparent, financial markets could go so disastrously wrong. But long history, experience and theory says that they should be expected to go badly wrong. So, what is the problem with admitting that? It’s even worse than the ‘It may work in reality, but it doesn’t work in theory’ problem, because it can happen in theory as well as reality. A rare case where economic theory and reality coincide!
People like Summers should be very proud of the vindication of economic theory and economic history. Embrace the Suck!
The CNBC story is at: http://www.cnbc.com/id/29029912
Tim Duy’s post is at: http://economistsview.typepad.com/timduy/2009/02/and-now-we-know-.html