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« AIG Bailout LIVE From Capitol Hill: Tim Geithner And Ben Bernanke Testify Before Congress | Main | Bank Bailout News: Complete Video And Transcript Of Tim Geithner's Interview With Erin Burnett Of CNBC »
Monday
Mar232009

Must See Bank Bailout News: James Galbraith Says Geithner Bank Rescue Plan 'Is Extremely Dangerous' (Video) 

 

I will have more later. Please enjoy both videos. This transcript is from Tech Ticker.

Tim Geithner has finally revealed his plan to fix the banking system and economy. Paul Krugman, James Galbraith, and others have already trashed it.

[We spoke with noted economist Galbraith this morning. In the accompanying segment, he calls the Treasury Secretary’s plan “extremely dangerous.”]

Why?

In short, because the plan is yet another massive, ineffective gift to banks and Wall Street. Taxpayers, of course, will take the hit.

Why does Tim Geithner keep repackaging the same trash-asset-removal plan that he has been trying to get approved since last fall?

In our opinion, because Tim Geithner formed his view of this crisis last fall, while sitting across the table from his constituents at the New York Fed: The CEOs of the big Wall Street firms. He views the crisis the same way Wall Street does--as a temporary liquidity problem--and his plans to fix it are designed with the best interests of Wall Street in mind.

If Geithner's plan to fix the banks would also fix the economy, this would be tolerable. But no smart economist we know of thinks that it will.

We think Geithner is suffering from five fundamental misconceptions about what is wrong with the economy. Here they are:

The trouble with the economy is that the banks aren't lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it. As consumers retrench, companies that sell to them are retrenching, thus exacerbating the problem. The banks, meanwhile, are lending. They just aren't lending as much as they used to. Also the shadow banking system (securitization markets), which actually provided more funding to the economy than the banks, has collapsed.

The banks aren't lending because their balance sheets are loaded with "bad assets" that the market has temporarily mispriced. The reality: The banks aren't lending (much) because they have decided to stop making loans to people and companies who can't pay them back. And because the banks are scared that future writedowns on their old loans will lead to future losses that will wipe out their equity.

Bad assets are "bad" because the market doesn't understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are. House prices have dropped by nearly 30% nationwide. That has created something in the neighborhood of $5+ trillion of losses in residential real estate alone (off a peak market value of housing about $20+ trillion). The banks don't want to take their share of those losses because doing so will wipe them out. So they, and Geithner, are doing everything they can to pawn the losses off on the taxpayer.

Once we get the "bad assets" off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they'll sit there and say they are lending while waiting for the economy to bottom.

Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they'll be working it off for years. House prices are still falling. Retirement savings have been crushed. Americans need to increase their savings rate from today's 5% (a vast improvement from the 0% rate of two years ago) to the 10% long-term average. Consumers don't have room to take on more debt, even if the banks are willing to give it to them.

The two charts below from Ned Davis illustrate the real problem: An explosion of debt relative to GDP. The first is Nonfinancial Debt To GDP. The second is Total Debt To GDP.

In Geithner's plan, this debt won't disappear. It will just be passed from banks to taxpayers, where it will sit until the government finally admits that a major portion of it will never be paid back.

Part 2 From Tech Ticker

Part II: Geithner, Obama Kowtowing to "Massively Corrupted" Banks, Galbraith Says

 

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.

That's hogwash, says University of Texas professor James Galbraith, author of The Predator 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.

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Reader Comments (9)

Isn't this the entire point of the Depression-era public/private banking hybridization? You guarantee private banks with various liquidity backstops to ensure that you "never" have a banking crisis. As the economy and financial system started taking on too much debt in the 70s and early 80s, we began pursuing this strategy in earnest, with especial vigor once Alan Greenspan was appointed Fed chair.

Did the effectiveness of post-Depression fixes depend upon the reckless assumption that the government would never screw up and do something like, say, granting an effective cartel to corrupt ratings agencies?

I agree with Galbraith here but it seems a bit late for him to be getting religion on the need for government to allow corrections in asset prices, and to allow failed banks to fail.
Mar 23, 2009 at 8:46 PM | Unregistered CommenterGraphite
@Graphite

"I agree with Galbraith here but it seems a bit late for him to be getting religion on the need for government to allow corrections in asset prices, and to allow failed banks to fail."

It is never too late.
Mar 23, 2009 at 10:37 PM | Unregistered Commenterspideydouble
I see your point graphite and I have never been a fan of galbraith, but bailout politics make for strange bedfellows.

And anyone with a pulpit who calls for receivership over the money drain gets my support.
Mar 24, 2009 at 1:33 AM | Registered CommenterDailyBail
Check out this link and then ask your congressperson to co-sponsor this bill.

It's Ron Paul's attack on The Fed.

http://www.campaignforliberty.com/

HR 1207 Co-sponsorship Skyrockets: Companion Bill in Senate

Ron Paul's "Federal Reserve Transparency Act" to audit the Federal Reserve is now up to 39 co-sponsors in the House, and an identical companion bill, S604, has been introduced in the Senate. Here are the House co-sponsors:

Young (R-AK), McClintock (R-CA), Woolsey (D-CA), Rohrabacher (R-CA), Castle (R-DE), Stearns (R-FL), Grayson (D-FL), Buchanan (R-FL), Posey (R-FL), Kingston (R-GA), Price (R-GA), Broun (R-GA), Abercrombie (D-HI), Burton (R-IN), Fleming (R-LA), Alexander (R-LA), Bartlett (R-MD), McCotter (R-MI), Bachmann (R-MN), Peterson (D-MN), Akin (R-MO), Taylor (D-MS), Rehberg (R-MT), Jones (R-NC), Foxx (R-NC), Garrett (R-NJ), Heller (R-NV), DeFazio (D-OR), Platts (R-PA), Duncan (R-TN), Wamp (R-TN), Blackburn (R-TN), Poe (R-TX), Paul (R-TX), Marchant (R-TX), Burgess (R-TX), Chaffetz (R-UT), Petri (R-WI), Kagen (D-WI), Lummis (R-WY)

32 Republicans and 7 Democrats so far. [Urge your Representative to co-sponsor] [Discuss here]
Mar 24, 2009 at 1:53 AM | Registered CommenterDailyBail
Very Good Article from Simon Johnson and James Kwak

A.I.G. can hardly claim that its generous bonuses attract the best and the brightest. So instead, it defends the payments by arguing they’re needed to retain employees who are crucial for winding down transactions that are “difficult to understand and manage.” In other words, only the people who stuck the knife into the American International Group can neatly extract it for a decent burial.

http://www.nytimes.com/2009/03/20/opinion/20johnson.html?_r=1&ref=patrick.net
Mar 24, 2009 at 2:14 AM | Registered CommenterDailyBail
Simon Johnson on the problems with Geithner's plan

http://baselinescenario.com/2009/03/23/let-the-people-in/
Mar 24, 2009 at 2:30 AM | Registered CommenterDailyBail
PLEASE GET THIS IDIOT STEVE LEISEMAN OFF CNBC OR CNBULL SHIT!! HE IS AN IDIOT!!

GET HIM OF CNBC!! NOW!!
Mar 24, 2009 at 10:50 AM | Unregistered CommenterBrasco
Wall St ran a little scam
it fleeced all those you know
and everywhere that Wall St went
the fraud was sure to go.
May 14, 2010 at 5:31 PM | Unregistered CommenterRecoverylessRecovery

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