[R-G] [BillTottenWeblog] A Trillion Dollars for the Banks

[Bill Totten]

How About a Second Opinion?

by Dean Baker

CommonDreams.org (April 06 2009)


Treasury Secretary Timothy Geithner wants to have the government lend up
to a trillion dollars to hedge funds, private equity, funds and the
banks themselves to clear their books of toxic assets. The plan implies
a substantial subsidy to the banks. It is likely to result in the
disposal of these assets at far above market value, with the government
picking up the losses.

As much as we all want to help out the Wall Street bankers in their hour
of need, taxpayers may reasonably ask whether this is the best use of
our money. After all, the $1 trillion that is being set aside for this
latest TARP variation is equal to 300 million SCHIP kid years {1}.
Congress has had heated debates over sums that were a small fraction of
this size. To give another useful measuring stick, the Geithner plan
could fund one million of the Woodstock museums that were the main prop
of Senator McCain's presidential campaign.

The core problem is that many of our big banks are bankrupt. If they had
to acknowledge the losses that they have incurred on their housing
related loans (and increasing their loans in commercial real estate)
Citigroup, Bank of America, and many other large banks would be
insolvent. Thus far, they have avoided reality by keeping these loans on
their books at inflated prices.

The Geithner plan is an effort to rescue the banks by using government
funding to prop up the price of these bad loans to levels that will
allow the banks to stay solvent. It is not clear that the plan is big
enough to accomplish this goal, but that is the basic intention. If it
doesn't work, then presumably Geithner will come out with another TARP
permutation that involves giving the banks even more money.

There is an alternative. Rather than using government money to keep them
alive, we could force the banks to go through a type of managed
bankruptcy process like the one that is currently being proposed for
General Motors and Chrysler.

Geithner has supposedly ruled out the bankruptcy option because when he,
along with Henry Paulson and Ben Bernanke, tried letting Lehman Brothers
go under last fall, it didn't turn out very well. Of course, it is not
necessary to go the route of an uncontrolled bankruptcy that Geithner
and Company pursued with Lehman.

The government could set up an arranged bankruptcy under which creditors
have accepted conditions in advance. While this may not be easy to
negotiate, the government does have enormous bargaining power in
pursuing such a deal. The creditors (other than insured deposits, which
will be paid in full) of these banks may end up with nothing if the
government just let the banks sink.

The prospect of even an arranged bankruptcy of a major bank will
undoubtedly shake up markets, but many safeguards have been put in place
since the Lehman collapse. If the stock market goes down for a few weeks
or months, who cares? Running the economy to serve the stock market is a
sure recipe for disaster; if President Obama fixes the economy, the
stock market will do just fine in the long run.

Anyhow, the Geithner crew insists that there are no alternatives to his
plan; we have to just keep giving hundreds of billions of dollars to the
banks. Perhaps Geithner is right. But before we throw such huge sums
away, further enriching the bankers who wrecked the economy, maybe we
should get a second opinion.

Suppose that Congress appropriated a modest chunk of money to have
independent economists put together teams to construct alternative
plans. Why not give MIT professor Simon Johnson, a former chief
economist of the IMF, $5 million to hire a crew to outline his preferred
path? Congress could give Joe Stiglitz, a Nobel Prize winner and
one-time chief economist to President Clinton, who is also a harsh
critic of the Geithner plan, a similar sum to put together his own team.

These economists could develop their best plans and put them out for
public consumption. Geithner's crew can then tell us why their plans are
unworkable and we must instead hand over the money to banks.

Given how much money Geithner wants to spend - putting it in the hands
of the folks that brought on this economic crisis - it would seem
appropriate to first examine all the alternatives. After all, we could
find out what our options are in this case for the price of just a few
AIG executive bonuses. That has to be a good deal in anyone's book.

_____


Dean Baker {2} is the co-director of the Center for Economic and Policy
Research {3} (CEPR). He is the author of The Conservative Nanny State:
How the Wealthy Use the Government to Stay Rich and Get Richer {4, 5}
and the more recently published Plunder and Blunder: The Rise and Fall
of The Bubble Economy {6} He also has a blog, "Beat the Press", where he
discusses the media's coverage of economic issues. You can find it at
the American Prospect's web site. [7]

Links:

{1} http://en.wikipedia.org/wiki/State_Children%27s_Health_Insurance_Program

{2} cepr at cepr.net

{3} http://www.cepr.net/

{4}
http://www.amazon.com/dp/1411693957?tag=commondreams-20&camp=0&creative=0&linkCode=as1&creativeASIN=1411693957&adid=1Q1525S4DMNAXAYFQ8EV&

{5} http://www.conservativenannystate.org/

{6}
https://www.amazon.com/dp/0981576990?tag=commondreams-20&camp=0&creative=0&linkCode=as1&creativeASIN=0981576990&adid=1RZEQ5WA6XE33K5W9Q5P&

{7} http://www.prospect.org/deanbaker

http://www.commondreams.org/view/2009/04/06-14


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