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- Economist.com | WASHINGTON
- The econoblogosphere
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: