The most important thing in the bank rescue plan should be cleaning up their balance sheets to the point where even in a worst-case scenario we don�t need to worry about bank solvency (at least for those banks that are left standing by the rescue). If the government announced, �we will buy any assets you want to sell, at their current book values,� this would be a massive subsidy worth hundreds of billions of dollars (and requiring trillions of dollars in initial outlays), but it would at least restore confidence in the banks. If the government announced, �we are taking over Citigroup, Bank of America, and JPMorgan because they are insolvent, and we will write down their questionable assets to nothing, recapitalize them, and later reprivatize them,� this would also restore confidence, although it would unleash a flood of litigation and political attacks against the government for engaging in �socialism.� But if instead you try to split the difference, avoid too much government involvement, and pretend you are not subsidizing the banks, you end up coming up with these too-clever-by-half subsidies that you are trying to hide from Congress and the public, and no one can be confident that they will work.James Kwak
, this morning while awaiting the Geithner Plan. RTWT. I think Jim Hamilton
has this right: If everyone on Wall Street loves this plan, it's probably a bad plan.
Labels: banking, economics