Tim Geithner announces his bank nationalization plan

Earlier this week, you asked the following:

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

I answered:

Since Bernanke has been drifting towards QE, I’m going to say that it can, in theory.

Today, the question was answered in the affirmative. Geithner also said the following, which were things that I needed to hear:

“The new rules must be simpler and more effectively enforced ”

“The huge apparent returns to financial activity attracted fraud on a dramatic scale.”

“These failures have caused a great loss of confidence in the basic fabric of our financial system”

“Financial products and institutions should be regulated for the economic function they provide and the risks they present, not the legal form they take. We can’t allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints. ”

“weakening lending standards”

“The rising market hid Ponzi schemes and other flagrant abuses that should have been detected and eliminated.”

“institutions and investors looked for higher returns by taking on greater exposure to the risk of infrequent but severe losses. ”

“New financial products were created to meet demand from investors”

“Until the Housing and Economic Recovery Act and the Emergency Economic Stabilization Act were passed in the summer and fall of 2008, the executive branch had effectively no ability to provide the capital or guarantees necessary to contain the damage caused by the crisis. ”

“But that difficulty has been compounded by a U.S. regulatory structure that is unnecessarily complex and fragmented.”

“to protect people from unfair and deceptive practices.”

“We must require that firms build up capital during good economic times so that they have a more robust protection against losses in down times”

“The regulator of these entities will also need a prompt, corrective action regime that would allow the regulator to force protective actions as regulatory capital levels decline, similar to that of the FDIC with respect to its covered agencies”

“In the wake of Lehman Brothers’ bankruptcy, we learned that even one of the most stable and least risky investment vehicles – money market mutual funds – was not safe from the failure of a systemically important institution.”

“create a resolution regime that provides authority to avoid the disorderly liquidation of any nonbank financial firm whose disorderly liquidation would have serious adverse effects on the financial system or the U.S. economy. ”

“despite the fact that many of those companies owned federally insured depository institutions or had other access to explicit or implicit forms of support from the government. ”

Of course, Geithner said some things that I disagree with, and the devil is in the details. However, this was an excellent presentation.

As to PPIP, I still need more details. Most of the commentaries that I have read proceed from assumptions that, quite simply, don’t square with what I read, or the reasons for the plan as I understand them. For example, the connection with QE hasn’t been widely discussed.

I guess that my main point is that I am quite impressed with Geithner and Bernanke this week, and feel the need to acknowledge progress when it occurs, even if the actions are not exactly the ones I would prefer.

don- Why the heck is Bernanke drifting towards Queen Elizabeth? You need to explain acronyms like QE and PPIP for duffers like me.