Here is Fed chairman Ben Bernanke, trying to coax the genie back into the bottle before the Senate Banking Committee earlier this week: “I don’t think that any major US bank is currently a zombie institution,” he said. “They’re all lending. They’re all active. And they’re all viable…. I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary.” (AFP, Bloomberg)
Hooey. But it’s still very much the party line at the White House and Treasury Department as well. Treasury Secretary Tim Geithner keeps flogging slightly modified versions of the “bad bank” idea, which now comes down to bribing private investors to buy toxic paper for more than its market value by guaranteeing them against losses. To which Paul Krugman retorts:
Every plan we’ve heard from Treasury amounts to the same thing — an attempt to socialize the losses while privatizing the gains. We’re going to buy up all the bad assets at premium prices; no, we’re going to offer the banks guarantees against losses; no, we’re going to let private investors buy the stuff, but offer them de facto guarantees against losses in the form of non-recourse loans….
[T]he insistence on offering the same plan over and over again, with only cosmetic changes, is itself deeply disturbing. Does Treasury not realize that all these proposals amount to the same thing? Or does it realize that, but hope that the rest of us won’t notice? That is, are they stupid, or do they think we’re stupid?
It seems the problem is buying toxic assets without accountability for those who caused the problem. People foreclosed on after medical bills or unemployment caused the them to miss mortgage payments certainly are being held accountable, but the people who made stupid loans and insured stupid loans and resold stupid loans are getting nothing but bad PR. I could see buying toxic assets provided executives of financial companies were prohibited from ever working in a financial industry again. People who lent subprime mortgages should be prohibited from working in the mortgage business again. Companies that were too big to fail should be broken up so that no one company is too big to fail.
Only with this degree of accountability would I be OK with public money overpaying for troubled banks’ assets.
“That is, are they stupid, or do they think we’re stupid?”
Hopefully that’s just a rhetorical question from Krugman. Obviously, Geithner and Obama’s allies in Fianance think we’re stupid.