The Times has a story in tomorrow’s paper gaming out where the administration seems to be going on a comprehensive bank rescue plan. The gist seems to be that we’re heading toward some version of the ‘bad bank’ plan; but they’re moving cautiously so as to avoid the ridiculousness of the Paulson days, coming up with a new plan every week or so.
The message they’re clearly sending is: we’re not going to ‘nationalize’ the banks.
What I wonder, though, is whether or not we’re running into a semantic dead end that is obscuring some more pertinent questions.
The core problem is that many, perhaps most of our major financial institutions are insolvent. They have more liabilities than assets. A functioning financial system requires solvent banks. And only the government has the resources to manage the massive recapitalization to get the key institutions back on their feet. At that level of generality, the issue assumes a degree of clarity.
All the different fix permutations are just different ways of accounting for the transfer of cash. You can take the banks over and assume their debts. Or just give them tons of money to make them whole. Or you can buy their bad investments at the price the banks wish they were worth and thus get the banks out of under the consequences of the financial collapse they helped create.
It’s not clear to me why the dollar amounts spent would really be different in the various permutations. It’s all a question of who owns what when it’s all said and done and who runs the institutions. According to a brief aside in yesterday’s article in the Post, both Geithner and Summers are against having the government run the banks for a transitional period and against wiping out the shareholders of the banks that are in fact insolvent.
What that sounds like is that we’ll nationalize most of the banks because we have no choice. But we’ll allow the current management to run the nationalized banks and the current shareholders to own the nationalized banks.
What am I missing?
