The Geithner Plan (or 'scheme')

[K.C.]

So I've been digesting this thing all day, trying to form an opinion on it.

And, at the end of the day, while there is a chance that this thing could work out to everyone's benefit, why the fuck don't you just use the Swedish model.

Krugman gave everyone a quick refresher in his Times op-ed:

As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

That’s what Sweden did in the early 1990s. It’s also what we ourselves did after the savings and loan debacle of the Reagan years. And there’s no reason we can’t do the same thing now.


This Geithner thing is so backwards. The government (and subsequently the taxpayers) takes all the risk and compounds the national debt...the banks get freed up, but with no additional oversight...everyone gets a degree of guarantee on this except the taxpayer.

It's pretty ridiculous, actually.

And it changes absolutely nothing about the system or the way business is going to be done. The whole point of the Swedish model, and the reason it worked, was because not only did it provide relief, but because of the oversight involved, it changed the fundamentals of the system and put new oversight and safeguards in.

This is just the equivalent of giving coke fiends a giant ball of money to play with.


And I'd be stunned if these loans pay back anything close to the 'potential' (the win-win scenario that will be spinned).

After all, there's a reason they're toxic.


At the end of the day, the only way us ham and eggers have a shot at making money off of this....buy Citigroup, Bank of America, and JP Morgan stock. If you can't beat them, join them.

[TripleSkeet]

This is a good read...

http://www.rollingstone.com/politics/story/26793903/the_big_takeover/

[Syd]

The reason for lack of oversight is that if it were, a lot of numbers would be put out that would cause bank runs. Most of these companies are on the hook for derivatives that far exceed their own market cap and rival the GDP of the nation. Then the derivatives on the banks themselves -- GM had roughly 40x its market cap tied up in derivatives a few months back. The amount of money that was being wagered is so great that it would cause a bank run if Citi had to come out and say "well yeah we're on the hook for in excess of a trillion dollars" because an oversight committee began investigating their CDOs and CDSs.

[SouthSideJohnny]

why the fuck don't you just use the Swedish model.


I'd like to use this one
http://i145.photobucket.com/albums/r203/SouthSideJohnny/NYHETER-23s10-model_244159w.jpg

[K.C.]

The reason for lack of oversight is that if it were, a lot of numbers would be put out that would cause bank runs. Most of these companies are on the hook for derivatives that far exceed their own market cap and rival the GDP of the nation. Then the derivatives on the banks themselves -- GM had roughly 40x its market cap tied up in derivatives a few months back. The amount of money that was being wagered is so great that it would cause a bank run if Citi had to come out and say "well yeah we're on the hook for in excess of a trillion dollars" because an oversight committee began investigating their CDOs and CDSs.

To a degree there's validity to that, but Sweden basically temporarily nationalized things and then sold them back to the private sector once the businesses recovered.

The government backing and guarantee that comes with temporary nationalization would prevent widespread panic like you're describing.

Now, nationalization would wipe out the shareholders, but hey...if you owned AIG at $40 and still own it at $1.30....you're pretty much wiped out anyway.

And that's the problem with Geithner's plan. They're essentially going to free up the toxic loans from the banks so the banks can begin rebuilding themselves and jump start the economy.

The problem, is that it's operating under the assumption that:
a) the banks know what the fuck they're doing now.
b) they won't do what they were originally doing.

And why should anyone believe either of those things are true at this point?

Geithner's plan is better than doing nothing, but it's such a 'bowing to the masters' love letter to these banks and Wall Street, it's kind of disgusting.

I do think part of the reason they're going this route is that Obama perceives nationalization as a potential rallying point for his opponents in 2010 and 2012, and he's a little scared to get pigeon-holed even more into the Socialist tag they're trying to hang on him.

[torker]

He reminds me of Exeter.
http://graphics8.nytimes.com/images/2006/08/22/arts/22dvd.2.650.jpg

[keithy_19]

He reminds me of Exeter.
http://graphics8.nytimes.com/images/2006/08/22/arts/22dvd.2.650.jpg

:lol:

[SP1!]

This is a good read...

http://www.rollingstone.com/politics/story/26793903/the_big_takeover/

Nothing in rolling stone can be taken seriously outside of music articles or entertainment.

[One Dead Fred]

The Rolling Stone article was pretty informative and clear. The clarity was a bit frightening. The more you know the angrier you get.

[Recyclerz]

Everything in rolling stone can be taken seriously outside of music articles or entertainment.

Fixed. :wink: I think Matt Taibbi is bucking to be the new Hunter Thompson and the guy has potential.



The reason for lack of oversight is that if it were, a lot of numbers would be put out that would cause bank runs. Most of these companies are on the hook for derivatives that far exceed their own market cap and rival the GDP of the nation. Then the derivatives on the banks themselves -- GM had roughly 40x its market cap tied up in derivatives a few months back. The amount of money that was being wagered is so great that it would cause a bank run if Citi had to come out and say "well yeah we're on the hook for in excess of a trillion dollars" because an oversight committee began investigating their CDOs and CDSs.

To a degree there's validity to that, but Sweden basically temporarily nationalized things and then sold them back to the private sector once the businesses recovered.

The government backing and guarantee that comes with temporary nationalization would prevent widespread panic like you're describing.

Now, nationalization would wipe out the shareholders, but hey...if you owned AIG at $40 and still own it at $1.30....you're pretty much wiped out anyway.

And that's the problem with Geithner's plan. They're essentially going to free up the toxic loans from the banks so the banks can begin rebuilding themselves and jump start the economy.

The problem, is that it's operating under the assumption that:
a) the banks know what the fuck they're doing now.
b) they won't do what they were originally doing.

And why should anyone believe either of those things are true at this point?

Geithner's plan is better than doing nothing, but it's such a 'bowing to the masters' love letter to these banks and Wall Street, it's kind of disgusting.

I do think part of the reason they're going this route is that Obama perceives nationalization as a potential rallying point for his opponents in 2010 and 2012, and he's a little scared to get pigeon-holed even more into the Socialist tag they're trying to hang on him.

I think there is a danger in using the Swedish experience as a model for us. Some Swedish gov't. banker said as much on a Planet Money podcast a few weeks ago. Sweden had a much smaller and less central financial system than we do. Still we could get some tips from studying it.

I think we have to use the existing system and the fucktards that caused the problems to unwind them because the whole global financial edifice is still too shaky to risk another run on the banks. If Citi or AIG implode it isn't only the common shareholders who get wiped out, it could be the bondholders as well (there's a lot of debt out there) and that will create a similar shockwave to Lehman failing. As emotionally satisfying as it would be to get out the tar and feathers for these bastards, we can't afford the luxury of revenge. Yet.

I think KC's last point is dead on. Obama knows he is going to need Republican cooperation/political cover in taking on Soc. Security and Medicare reform and doesn't want to blow up any bridges yet. Let's hope the stuff he's already done starts to work soon.

[Syd]

I do think part of the reason they're going this route is that Obama perceives nationalization as a potential rallying point for his opponents in 2010 and 2012, and he's a little scared to get pigeon-holed even more into the Socialist tag they're trying to hang on him.

I don't know why and I can't put it into words but even as someone with strong socialist views the notion of nationalizing banks sounds really, really bad. There's some sort of conflict of interest involved that makes what is best for the sector and what is best for the country collide. Due to the way that homes provide tax relief for people and other people see real estate as an investment market the government would be obligated to provide loans to all. However because of that it would just cause the exact same bubble we're in now though to far less extent.

[WRESTLINGFAN]

What worries me most is the money supply situation. It gradually increases and all of a sudden it goes up vertically Last week a trillion dollars was created. Inflation is coming, our dollar will be devalued. The chinese are worried about the dollar as well


http://research.stlouisfed.org/fred2/data/BASE_Max_630_378.png

[Syd]

The USD is experiencing, or was experiencing, deflation. So inflation right now is a very good thing, especially since despite Reagan's better efforts America still has a manufacturing industry.

As far as the Chinese were concerned, they're looking for a basket currency that can shrug off the effects. The USD will remain reserve currency, the basket currency is the alternate investment as gold isn't a sound backup investment nowadays due to lack of liquidity on a scale that China is interested in.

[TheMojoPin]

Miss stagflation.