The Obama/Geithner Financial Stability Plan unveiled today will avoid stories like this one from the Great Depression:
"Well, I suppose that they had so many outstanding – they were not active loans, they couldn't get the money in – and there was a neighboring town that the bank began to get into big trouble. And the banker, one evening he drove along the road about three miles east of Gresham, and he used a gun on himself. That wasn't unusual for bankers to commit suicide."
Despite skeptics such as myself initially, I believe t's going to be different this time around:
The main points of the FSB were unveiled today (see Fact Sheet). In my opinion, these break out into three categories:
- Pump up the money supply to consumers, businesses, mortgages and, potentially, private equity. This is a co-ordinated action through several Federal agencies to get credit moving again at the consumer level. If you have not seen it yet, check out the shocking video of the crisis we faced a few months ago, the reverberations of which are still being felt today. One TRILLION dollars was the number mentioned.
- Dump the toxic assets into a cess-pool ("bad bank") called the Public-Private Investment Fund. Big private equity players are invited to participate in this fund. Presumably, when the details come out on government guarantees, there is no way they could lose money. And they could stand to make HUGE amounts of money: this is the big carrot to get private equity to participate in this program. This part of the program may be viewed skeptically as a give-away to big capital, but IMHO, it is needed to get private money on board the program.
- Watch all players diligently: a comprehensive valuation, reporting and selecting process for banks. There will be much more balance sheet transparency (which banks are REALLY bankrupt versus ALMOST), websites for reporting, compensation restrictions and other controls. These are not aimed at bankrupting banks (and shareholders), but to achieve the opposite: enable them to remove toxic assets and start functioning to the betterment of shareholders and customers. This could be a mixed bag for shareholders and the taxpayer, since it imposes restrictions, but also gives relief to the banks.
IMHO, this is not a socialist, but a capitalist approach to resolving the banks' situation. Although it puts the US taxpayer squarely at the center of the action, and at risk, it provides several ways for the banks and private parties to make money through enabling the flow of credit to consumers and businesses. Absolutely the taxpayer is taking the risk here, and that means we could lose all the money just "propping up failed institutions". At the same time, the entire banking system is at risk of collapse, so doing nothing is not an option. I believe Team Obama has negotiated a careful pathway on a bumpy road that could lead to systemic stability in months, not years. The devil, though, may be in the details.
Although critical of bank giveaways in the past, this time I believe congratulations are due to Geithner and Team Obama for an elegant solution to the most pressing problem of our times.