Professor James Galbraith didn’t pull any punches on TechTicker this morning (click videos below). He hates the Geithner plan, calling it “extremely dangerous.” He says the banks may game the plan to bid up the prices for their own crap assets and that getting bad assets off their books won’t get them lending again.
Like Paul Krugman, Galbraith thinks the FDIC should just put the banks into receivership and have the banks’ subordinated bondholders pick up some of the cost of restructuring them.
Part 1: Getting crap assets off bank books won’t save economy:
Aaron Task, TechTicker: Like it or not, many people seem to be resigned to the idea there’s no alternative to the public-private investment fund scheme Treasury Secretary Geithner detailed this morning. (Click here for part one of our discussion of the plan.)
That’s hogwash, says University of Texas professor James Galbraith, author of The Predatory State. Of course there’s an alternative: FDIC receivership of insolvent banks.
Aside from being legally proscribed, the upside of FDIC receivership is the banks are restructured and reorganized for potential sale (either in whole or parts), Galbraith says. Such was the fate in 2008 of, most notably, Washington Mutual and IndyMac.
Crucially, FDIC receivership also means new management teams for insolvent banks; and Galbraith notes new leaders will have no incentive to cover up the fraudulent or predatory lending practices of their predecessors. Given the entire system was “massively corrupted by the subprime debacle,” the professor believes criminal prosecutions on par with the aftermath of the S&L crisis – when hundreds of insiders went to jail – is a likely (and necessary) outcome of the current crisis.
But don’t expect to see many “perp walks” if Geithner’s current plan comes to fruition. That’s one reason Galbraith called the plan “extremely dangerous” in part one of our interview.
So why isn’t the Obama administration pushing for FDIC receivership? “Political influence of big banks,” the economist says.
PART 2: Massive corruption