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TODAY’s recommended economics writing:
The discussion of Tim Geithner's banking plan continues. In today's Washington Post, Lucian Bebchuk, who responded to Hank Paulson's original asset purchase proposal by arguing for public-private funds bidding for assets at auction, says the Geithner plan is pretty good, but for one thing:
But while the program is intended to partner public and private capital, the partnership it sets up is quite unequal. As things stand, the private side -- the private manager and investors possibly affiliated with it -- would capture 50 percent of the upside but would bear a disproportionately small share of the downside, contributing as little as 8 percent of the fund's capital.
Treasury officials believe that because private parties have not thus far established funds dedicated to buying troubled assets, favorable terms are needed to induce their participation. This logic is reasonable, but it is important to keep the government subsidy at a minimum. Without any market check, the terms set by the government could substantially overshoot what is necessary to induce private participation and end up imposing large and unnecessary costs on taxpayers.
His solution? Have private investors bid on the share of the upside they're willing to accept in the partnership. He really likes auctions.
Meanwhile, Adam Posen has a very sobering look at the Geithner plan which, he says, duplicates many of the mistakes that Japanese leaders made before they were finally forced to get serious with the banking sector. It's not a pleasant read. But as Matt Yglesias notes, his is more an indictment of the American government as a whole—and by extension the American polity—than of the Geithner plan. It is inadequate, but it also seems to be the most the administration can produce at this point.
But some caveats are in order. The connexion between flailing banks and economic weakness isn't as clear as is often asserted. Some researchers have argued that Japanese household debt was the real source of the lost decade, which isn't encouraging for America but at least suggests a different policy tack. Mr Posen also notes that the Japanese economy began to take off in 2002, when it got serious about fixing the banks. But that also happens to be when Japan's recent export boom began. In any sample of two or three, significance will be difficult to obtain.
Deepening the sample to include two recent American experiences is James Surowiecki, in a very good column.
Elsewhere, Felix Salmon answers questions about the financial savviness of journalists.
Calculated Risk helpfully summarises March in charts.
And GM inspires confidence as only GM can."
Me:Don the libertarian Democrat wrote:
"That is why the Geithner plan is so complex and jury-rigged, to avoid the need for public requests for more money for banks. Unfortunately, it is unlikely to succeed absent additional public money and more-intrusive government action. The plan will buy some time and certainly some appreciation in bank share prices. Current shareholders will be getting a new lease on life with subsidies from taxpayers. For that reason alone, the plan certainly will cost the taxpayer more in the end than a more direct recapitalization with public control would have."
It's complex and jury rigged because it's a Government/Private Hybrid Plan, that has to balance competing interests and incentives. TARP was bound to be that from the start. It is not simply the need to avoid asking for more funds from the Congress.
"In essence, the U.S. Treasury’s plan to subsidize private investors’ purchases of the banks’ toxic assets is a too-clever-by-half mechanism to fix the banks while avoiding going to Congress for more upfront on-budget expenditures. One can imagine the discussions at the White House: We have a budget to pass, and cannot give up those goals to give the bankers still more. Figure out some way to do this off-budget. And so the Geithner plan hugely bribes private investors with taxpayer money, as Simon Johnson, Paul Krugman, Jeffrey Sachs, and I have all described, with one-way government insured bets. Yet the bets are contingent, they only pay when the taxpayer loses—and those losses first appear on the Fed or FDIC balance sheet, not subject to congressional approval."
The government gave an incentive to hold these assets in hopes of government help when it saved AIG. In giving the banks money, it also gave them the resources to hold out for a higher price. Although the TAs have been selling, expecting government aid in this current crisis is a good bet. Because of these incentives and subsidies, buyers need to receive incentives and subsidies as well now. That's just part of the deal.
If you assume that everyone who is really involved in this knows that the government cannot really seize these large banks as of now, it becomes easier to see why this plan has worked out this way.
We are just buying time until we can actually seize these large banks, but, except for just letting the problem fester until then, we don't have much choice. I don't think that these auction ideas are of much help, because the investors who will buy these TAs know that they are going to need as CDS on future possible taxes, and so they know that there's a possible downside, even if they make money.
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