Wall Street & Markets

Does the new Geithner plan provide a path to intelligent nationalization?

By Justin Fox | March 23, 2009 | +

John Hempton describes what he thinks should happen after the Treasury’s Public-Private Investment Program is up and running:

I want the regulators to come into the banks and say – now you have a ready – if somewhat subsidized market for your assets then it is no longer tenable for you to say that the market price for them is unrealistic.

This asset that you have marked at 95% of par.  We want you to sell some of it (or a part interest in it or similar.)  If you get 75% of par – then we want you to mark your book to 75.

If – given a real market for bank assets – you are shown to be capital inadequate then you should have time (say 6 weeks) to raise private capital.  Failing that your bank becomes government property. …

Nationalisation without process – which appears to be the alternative – is a dagger to the heart of capitalism.

Tell me a process that will have banks and regulators with adequate external parties indisputably saying to bank management “this asset should be marked at 75 and you have it marked 95” then I will listen.  Until then the objectors to the Geithner Plan are left saying “nationalise now”, but without an answer to the nasty question of which banks to nationalise.

This is pretty much how I see it, too. It’s possible that Hempton and I are giving Tim Geithner too much credit to imagine that he might be thinking along these lines as well. But it’s also possible that the Krugmen of the world are giving him way too little credit.

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  • tc125231

    In a reply to bloggers of his original post, hempton complains that people don’t understand numbers, which he finds frustrating.

    Well and good. Please explain why saying nationalization without this expensive subsidy of a few entities consitutes a “dagger at the heart of capitalism” constitutes a logically transparent refutation of Krugman’s call to nationalize banks now.

    As far as I can tell, Hempton’s post is an apparently logical rationalization of an emotionally held position. This is certainly his right, but rationalizations are a dime a dozenfor almost anything.

    As an aside, did Hempton predict this mess? Krugman did a pretty good job of predicting it. This should buy his thinkin g at least a a fair hearing, which, frankly, you have not provided.

    Is it because you share an emotianal bias suimilar to Hempton’s?

  • tc125231

    I actually believe that DeLong does a better job of arguing for Geithner’s plan.

    http://delong.typepad.com/sdj/2009/03/the-geithner-plan-faq.html

  • previouslyjustlindas

    I sincerely hope that you are right. However, your position assumes a neutral public perception of the program and I feel that is a highly unlikely outcome. I think the AIG bonus fiasco is a side-effect of this type of approach to the problem. Thus, I am quite sure that at some point it will become apparent to the public that this program has permitted some kind of outrageous behavior to slip through the cracks, but (as we haven’t yet tried this particular version) we just don’t know what it is yet. The most troubling candidate I’ve read so far is that the program won’t weed out banks from bidding on their own toxic paper as means of transferring all the risk of loss to taxpayers via a subsidized loan. This type of scenario would cause a huge sense of outrage – outpacing everything we’ve seen before. Politically, we may not be ready for nationalization (I think that is hugely debatable) but when the next scandal hits (and I think it’s inevitable) – we will have a rerun of the Bush/Hank Paulson political crisis of having no remaining faith in the ability of our government to ever do the right thing by the population as a whole. This terrifies me greatly as I think this is the biggest game of political chicken ever played and I don’t think it will end well.

  • pneogy

    Thank you for this informative and balanced post.

  • donthelibertariandemocrat

    Since Bernanke has been drifting towards QE, I’m going to say that it can, in theory. I notice that Mexico has already said that they’ll allow an exception to the level of foreign ownership of Banamex. My problem then is why not announce you’ll seize the banks if you have to? I’m assuming that the government really doesn’t think that they can if they’re not announcing it. So, this is an empty threat:

    “If – given a real market for bank assets – you are shown to be capital inadequate then you should have time (say 6 weeks) to raise private capital. Failing that your bank becomes government property. …”

    Since the government is announcing a plan to stop “Too Big To Fail” today, I’m also assuming that means that they believe that they can’t do it yet.

    Finally, China went all funny about QE today as well, so I don’t think that defaulting on bondholders would do us a lot of good should we seize the banks.

    I don’t like it, but it sounds like they really believe that they’re stuck. Of course, if this all goes sideways, no one is going to care about that.

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