Monday Aggreposting II: Banking on Tim

» WSJ: My Plan for Bad Bank Assets (Sec. Tim Geithner)
Straight from the man himself ...

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

This isn't far removed from what a lot of the first-round of gripers were wanting of out Obama & Geithner - something that mirrored the S&L-era Resolution Trust Corporation. Ironically, this version starts off with a combination of public and private funds, compared to the more publically funded RTC. In other words - Barack Obama is acting less like a socialist than George H. W. Bush.

» NYT: Financial Policy Despair (Paul Krugman)
Criticism from the left ...

The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks' books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn't be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to "fair" levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama's top economic adviser, is to use "the expertise of the market" to set the value of toxic assets.

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn't really about letting markets work. It's just an indirect, disguised way to subsidize purchases of bad assets.

There are some garden-variety Krugman flaws in this column. Namely, the overgeneralizations. In this case, all bankers are now to be lumped in the category of "ineffectual." Presumably, this means Krugman would rather see a greater reliance on bureaucratic-run banks in receivership. The Sweden case is offered as an example. Left out from this point is some context about the concentration of bank ownership in Sweden compared to America, plus the point that there is nothing inherently better about the relatively limited FDIC staff to operate banks throughout America to the extent that would be necessary (under the prescription Krugman seems too afraid to make in this column).

Not too surprisingly, Sullivan notes Krugman's causticity.

» WSJ: Now Is No Time to Give Up on Markets
Not quite qualifying as "criticism" from the right, but Gary Becker's take is worth a read ...

"I do believe that in a risky environment which is what we are in now, with the market pricing risk very high, to add additional risk is a big problem, and I think this is what we are doing when we don't have consistent policies. We add to the risk."

On the subject of recovery, Mr. Becker repeats his call for lower taxes, applauds the Fed's action to "raise reserves," (meaning money creation, though he said this before the Fed's action a few days ago), and he says "I do believe one has to try to do something more directly to help with the toxic assets of the banks."

How about getting rid of the mark-to-market pricing of bank assets [that is, pricing assets at the current market price] that some say has destroyed bank capital? Mr. Becker says he prefers mark-to-market over "pricing by cost because costs are often completely out of whack with what the real prices are." Then he adds this qualifier: "But when you have a very thin market, you have to be very careful about what it means to mark-to-market. . . . It's a big problem if you literally take mark-to-market in terms of prices continuously based on transactions when there are very few transactions in that market. I am a mark-to-market person but I think you have to do it in a sensible way."

Becker's more direct, co-written op-ed offers some intelligible conservative critiques of the overall policy direction that Obama has taken to right the economic ship. Given his criticisms there, it would be interesting to see some follow-up in light of Becker's comments about the need for direct action at helping banks find a market for their "toxic" assets. Worth pointing out again ... Obama's plan is less government-heavy than Bush-41's. It may also be worth some enterprising research to see what Becker had to say in the late 80s about that.

» NY Mag: Inside Obama's Economic Brain Trust (John Heilemann)
Heilemann gives us the behind-the-scenes portrait. The first half recounts the decision-making of which person to put in the Treasury: Summers or Geithner. The second half gives a brief overview of the battles fought to get the stimulus legislation passed, but closes with what I suspect is the first battle of Obama's legacy: Is he a Rubinista or not?

When Obama picked Geithner and Summers as his top two econo-poobahs, the main knock against them came from the left: They were both protégés of Bob Rubin. And, to an extent, it was true. Both had worked under Rubin in the Clinton administration. Both considered him a close friend, a mentor, a rabbi. Both had advocated the core policy positions that defined Rubin's time in government under Bill Clinton: free markets, free trade, globalization, deregulation, fiscal discipline = good; big deficits, protectionism, xenophobia, class warfare = bad. In this sense, they were proponents of what became known as Rubinomics.

Two months into the Obama era, however, it's hard to detect many traces of the Rubin doctrine in what the new president and his people have done or are planning to do in the future. The administration proposes to run a $1.17 trillion deficit in 2010. It intends to reregulate the financial industry. The reduction of income inequality is at the core of its tax and spending proposals. Its budget plan reflects "the largest commitment [to public investment] in 40 years," notes Bob Reich. And it imagines a level of direct government involvement in the market (and particularly in the banking sector, nationalization or no) that would have Rubin spinning in his grave--if he weren't still kicking, that is.

With an agenda like this, it might be tempting for Obama to tilt toward a full-throated kind of left-leaning populism--especially at moment when populist ire in all its incarnations is plainly in the ascendancy. Some of Obama's political people, including his senior adviser, David Axelrod, certainly have inclinations in this direction, and are plainly worried that the populist ascendancy might threaten to derail his agenda unless he co-opts it. But honest-to-Betsy populism neither suits Obama temperamentally nor would serve his interests. In a time of profound economic paroxysm, Obama needs the private sector on his side. He needs its energies, its productive capacities, its ideas, its support. Government can help prevent the economy from spiraling down the drain, but only the engines of commerce and entrepreneurship can power it to full and lasting recovery.

The balancing act that Obama must therefore pull off is a hell of a party trick. He must court the elites without pissing off the masses and soothe and provide catharsis for the masses without alienating the elites. His political advisers, seeing his poll numbers beginning to slip, are applying their war paint and preparing to do what they do best: pick a fight with the Republicans. (Rush Limbaugh, anyone?) But however tempting this might be, Obama would do well to rein them in. Not because there's any inherent virtue in bi-partisanship or kowtowing to Republicans. But because picking fights during a national crisis looks small, unserious, and faintly oblivious to the severity and significance of what's occurring around us.

This is not, in short, an us-versus-them moment. It could be, should be, an all-hands-on-deck moment. Obama, I suspect, understands this better than most of the people around him. Late in his campaign, Obama gave a speech in Indianapolis in which he unfurled a kind of optimistic, soft populism that was both eloquent and perfectly calibrated for the times.

There's a fairly heavy presence of Robert Reich throughout this topic of the article. I'd be hard-pressed to think of one person with more of an axe to grind on this point, so it's probably not all that paranoid to think that Reich poisoned this article a bit.

For my own taste, I don't think the determination is to be made that Obama/Geithner/Summers are going to spend four to eight years enacting policy that either mirrors the Rubin model or repudiates it. At least not in sum total.

The simple fact of the matter is that these are very different times. They require a very different set of solutions than Rubin & Summers faced in 1993. I think Heilemann wraps up this point a bit too loosely for now. At some point down the road, I'd expect the final chapter on this era of the American economy to realize the point a little more.

» The 60 Minutes interview ...

Part one:

Part two:

ADD-ON: The banking plan details via Treasury.gov and a little 5-page white paper for the wonk within.