Paul Krugman is as angry as we are that the Administration is preparing to transfer another hundreds of billions of dollars to bank managers, shareholders, and bondholders while getting nothing for taxpayers in return.
With all the brainpower and fresh eyes that just got to Washington, we hoped that Obama, Geithner & Co. would do the right thing: Let bankers who bet and lost their firms accept the consequences. Instead, as Krugman observes, we’re just getting four more years:
Paul Krugman, NYT: “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system,” says Timothy Geithner, the Treasury secretary — as he prepares to put taxpayers on the hook for that system’s immense losses.
Meanwhile, a Washington Post report based on administration sources says that Mr. Geithner and Lawrence Summers, President Obama’s top economic adviser, “think governments make poor bank managers” — as opposed, presumably, to the private-sector geniuses who managed to lose more than a trillion dollars in the space of a few years.
And this prejudice in favour of private control, even when the government is putting up all the money, seems to be warping the administration’s response to the financial crisis.
Yes, the banks need more money. Yes, we should avoid bankruptcies. And, yes, in exchange for our money, we should get what any private-market investor demand: compensation (in the form of stock ownership) that justifies the risk. But because this compensation would temporarily violate some preconceived horror of “nationalization,” the Administration refuses to even consider it.
[B]ank stocks are worth so little these days — Citigroup and Bank of America have a combined market value of only $52 billion — that the ownership wouldn’t be partial: pumping in enough taxpayer money to make the banks sound would, in effect, turn them into publicly owned enterprises.
My response to this prospect is: so? If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome.
If news reports are right, the bank rescue plan will contain two main elements: government purchases of some troubled bank assets and guarantees against losses on other assets. The guarantees would represent a big gift to bank stockholders; the purchases might not, if the price was fair — but prices would, The Financial Times reports, probably be based on “valuation models” rather than market prices, suggesting that the government would be making a big gift here, too.
And in return for what is likely to be a huge subsidy to stockholders, taxpayers will get, well, nothing.
Tim, would it be too much to ask to ask you to at least explain WHY you’re not fixing the banks the right way?