Martin Wolf of the Financial Times is on fire over the Geithner/Obama bailout plan.
I thought Wolf’s lede was over-the-top when I read it; much less so after I wended my way through his entire piece.
Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.
What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.
It’s difficult to find a bone to pick with Wolf’s arguments, and his urgent tone, like Pearlstein’s outrage this morning, is much needed.
All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency…Under the first view, the prices of a defined set of “toxic assets” have been driven below their long-run value and in some cases have become impossible to sell…
Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities…
Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so.
Nouriel Roubini made this case—that the banks are insolvent and need to be nationalized—yesterday, as well.
Here’s Wolf’s capper:
But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing.
Martin Wolf is no paranoid gold bug or Wall Street-hating firebreather. He’s a Davos-going, well-respected economics writer—and a Commander of the British Empire, for crying out loud.
I hope Mr. Obama is reading his FT.
I have this question that's been bubbling in my mind for some time now, but to date have read no commentary about it. I'll happily admit I'm naive, but ...
Paul Krugman refers to a shadow banking system that is largely responsible for what's going on in the economy right now. Fancy phrases like "collateralized debt obligations" and "commercial paper" are part of that shadow banking system. There were off the regulatory radar, Krugman says, because they were innovations, not necessarily because anything shady was occurring. My question is: does TARP, and the current proposed bailout, legalize and legitimize these things?
If so, why aren't journalists barking up the following tree: a collateralized debt obligation allows other people to essentially buy "shares" of a bundle of mortgages. Now, it stands to reason that the investors in CDOs have some amount of legal claim over the mortgages that comprise the CDO (just as shareholders in a company have some legal say, however small, in how that company does business). That means that investors, who can even be overseas, have some amount of legal claim over the mortgages of individual homeowners. Is that really a good thing to legitimize, institutionalize?
A lot has been said about the difficulties in allowing homeowners to renegotiate the terms of their mortgages with their banks, an issue that is especially relevant now as the idea floats in Congress. One oft-cited reason is that banks tend to sell mortgages to other entities, and these other entities have no incentive, and perhaps no resources, to renegotiate with homeowners. However, it could go deeper than that. It could be that bundling mortgages into CDOs suddenly creates a legal rat's nest: who would invest in a CDO if, at any time, the terms of the mortgages on which it is based can change out from under the investment? There is a conflict of interest at work: the CDO as such creates an incentive not to renegotiate mortgage terms.
It'd be one thing if CDOs were tragically flawed innovations that disappeared as a result of the present crisis. But if the bailout money goes, in part, to propping up, legitimizing, legalizing, and institutionalizing CDOs, then the net effect, it seems to me, is to compromise the power of homeowners to renegotiate their mortgages with the issuing bank. How is that possibly good for anyone but investors?
It's be nice to see some journalists digging into these questions harder. Any pointers?
#1 Posted by Anthony, CJR on Thu 12 Feb 2009 at 11:30 AM