Trying to Come to Grips with the Baking Crisis
How do we purge the toxic chocolate chips from the system so that those who want to consume cookies can do so without fear that they’re going to end up with a pile of worthless desserts?
…The banking crisis may be something that’s well over my head. This is all just instinct: I’m pretty sure that the present ad-hoc response to keeping these damaged institutions alive isn’t going to work, because it doesn’t address the underlying problem of asset sheets overbalanced with worthless derivatives. I’m pretty sure that, as Paul Krugman wrote this week, that the Obamadministration is mistaken in thinking that they can assume these debts on behalf of the banks and re-sell them at some point when their value becomes known, because they may have very little value overall. I’m not sure that nationalization works, because I’m not clear what that does besides take their (the banks’) problem and make it our problem. In addition, the risks to nationalization in terms of government credibility seem huge if indeed the Geithnerites are wrong in their valuation of the toxic assets. In short: I have no suggestions.
That leaves me with two questions, two possible paths that haven’t been explored:
1. Why can’t the government charter new banks, pristine virgins flush with taxpayer cash, that can get about the explicit mission of lending dough and getting the economy going, while letting these cancerous old banks fend for themselves, to live or die on their merits? Eventually, these new banks can be sold to the public. We’ve done this kind of thing before, with Fannie Mae, for example.
2. Failing that, why can’t the government lend the banks a sufficient amount of cash to take the toxic stuff off the books, lend it to them at a nominal interest rate, and let them pay it off over time, a hundred years if necessary? That way, the banks can just dispose of the assets. Flush. They got the money for them, they’re gone. The government makes a few bucks on the transactions over time. I guess you still have the same problems with valuing those assets that the Geithnerites do now.
As I said, this isn’t my area of expertise. That said, it doesn’t seem to be anyone’s area of expertise.
March 8th, 2009 at 3:56 pm
Well, I think I can tell you why option 1 won’t work (bear in mind I’m relying on Krugman & Planet Money inform my thinking): creating new banks won’t help. The issue is not that there aren’t banks out there that could lend money, it’s that if these cancerous old banks fail, they quite possibly take the global economy down with them. The FDIC can cover normal people’s savings (though at an enormous cost to the taxpayers), but it won’t help the thousands of business with over $100k in savings.
As for #2, isn’t that essentially what the Geithner plan is right now, albeit with buying stock instead of “lending” money? We are pumping money into the banks already. Why would it make a difference if it was a “loan” versus an ownership stake?
March 9th, 2009 at 12:34 pm
I think when Corey Booker was on Bill Maher this week he said that Newark was trying something like plan 1. Oh you who get to read the Star-Ledger itself, is this true? Is it working? I was having trouble Googling any helpful stories.
March 9th, 2009 at 2:36 pm
I would have saved myself the typing if I knew Nate was going to address this: http://www.fivethirtyeight.com/2009/03/do-americans-want-to-nationalize-banks.html
March 13th, 2009 at 5:30 pm
This is a good summary of the various meanings of ‘nationalization’:
http://seekingalpha.com/article/125053-bank-nationalization-5-different-meanings
March 13th, 2009 at 6:53 pm
A baking crisis would be very sad for the bread industry.