It’s almost hard to know how or where to criticise Tim Geithner. That’s because after all the buildup, Tim Geithner came out but didn’t have anything to say. Nothing on housing. Nothing on toxic assets. Nothing on anything.
Somehow Geithner got confused and decided to repeat a bunch of buzzword — transparency and clarity for actual, you know, real clarity. Turns out it’s not enough to just say that financial markets need stability confidence and clarity if you can’t actually provide those things.
So here’s what Geithner ought to have said, and what we think he may be forced to say in the end:
After much intervention, guaranteeing of bank loans and capital injections, it’s clear that many of our major banks aren’t healthy enough to stand up on their own. History has shown that efforts to prop up zombie financial institutions are doomed to failure. In fact, the surest path to a depression and continued tight credit is to pump capital in the weak.
We must make the real hard choices, not just talk about making hard choices
We have to accept that our debt levels got out of hand during the boom, and returning to them isn’t desirable. Any effort to get credit where it was would merely be an attempt to return to an unsustainable status quo, and that’s not the change we need. Before we go back to consuming like crazy, we have some debts to be paid off
As such, our financial system is still too big. Companies that aren’t healthy, even with substantial leverage, will be temporarily nationalized. This will mean pain for shareholders and bondholders, who will have to take their lumps like everyone else.
Some will be disappointed that we’re not taking so-called toxic assets off the books, but there’s no way to do that without improperly rewarding banks by hosing taxpayers. The sad truth is that we have a real market in this assets. They’re not frozen. They’re just at prices that banks can’t stomach to sell.
As government is not a good long-term steward of the banks, the plan is to quickly sell the healthy parts to the remaining banks, so that they get even healthier, allowing profits to return to the system.
This won’t be easy. There’s no way pain-free way to smooth over the reckoning. But with American perseverance and generosity, we’ll be fine.