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Tuesday, February 10, 2009


Economists React: Treasury Announcement Fails to Satisfy
Economists and others weigh in on the Treasury Department’s latest proposal to prop up the financial system.

A major disappointment. The new plan discussed some of the ideas that have been floated in the media over recent days, and delivered some cosmetic re-labelling of existing programs, but many of the fundamental questions that former Secretary Paulson encountered last Fall remain unanswered. In particular, the terms at which troubled assets are purchased from banks are still being “explored.” –Michael Feroli, J.P. Morgan Chase

The speech and accompanying fact sheet leave open many questions about the timing of these interventions and the terms of asset purchases and recapitalization. Much of the program clearly remains to be worked out over the coming weeks and months… Rather than a fully government-funded bad bank, the Treasury will attempt to catalyze private sector investment via a “public-private partnership.” … It is clear from Geithner’s remarks that this is a concept at this point, rather than a fully designed entity — Geithner mentioned getting public comment on the potential structure. Supposedly, private sector investors will determine the prices (perhaps with the benefit of cheap financing or partial loss protection from the government). –Goldman Sachs

While sounding aggressive, the lack of details on the asset buying plan was disappointing. –Michelle Meyer, Barclays Capital

Perhaps the centerpiece of today’s announcement is the commitment up to $1 trillion to revivify the collapsed market for securitized debt that previously allowed unprecedented levels of lending in the home, auto, student, and credit card sectors. Geithner makes the false assumption securitization is a prerequisite for healthy markets. Our nation’s short history with widely securitized debt has simply shown that the process can lead to massive mispricing of assets and risk. But, in the worldview of Geithner and his fellow economists, credit, rather than savings, is central figure in the economic equation. In his mind, anything that eases the process of lending is an end in itself. in so doing this plan guarantees that the U.S. economy will be pushed farther and farther out on a leveraged limb, until no amount of market medicine can prevent a total economic collapse. –Peter Schiff, Euro Pacific Capital

It’s really not clear what the plan means; there’s an interpretation that makes it not too bad, but it’s not clear if that’s the right interpretation. The plan deserves praise for what isn’t in it, at least as far as I can tell. There doesn’t seem to be provision for mass purchases of toxic waste at premium prices; there also doesn’t seem to be a massive “ring-fencing” guarantee against private losses on bad assets. In that sense the plan is better than what the last few weeks of leaks led us to expect… So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place. –Paul Krugman, Princeton University

With the U.S. and global recessions intensifying , pressure on banking system remains huge, notwithstanding the injection of close to $276 billion in capital to the U.S. banking system under the first phase of the TARP program. With further large write-downs to banking system assets pending, that will put additional severe downward pressure on banking system capital. Unless that void is filled fairly quickly — we estimate that the banking system will require an injection of between $250 and $300 billion of additional capital in the first half of 2009 — we will continue to see very tight lending conditions, and the unlocking of the credit markets that is essential for securing a recovery will simply not happen. The biggest risk is that the massive fiscal stimulus program that is rolling through Congress will be stillborn as a result of not dealing up front with these critical capital adequacy issues in the financial markets… The bottom line from the Geithner speech is that it was too general, and it lacked the specifics needed to it to be credible. The speech had too many political overtones and the politically-charged preamble by Senator Chris Dodd did not set the stage appropriately for what was a communication that was directed to mainly a technical audience from a key administration technocrat. –Brian Bethune, Global Insight

The size and breadth of the package show that the government recognizes the scale of the problem and suggests that it will be prepared to do more if necessary. And the terms of the new cash injections appear to have a greater chance of boosting lending than those seen in other economies. Overall, while the FSP may not be perfect, it is likely to have a beneficial impact on the financial system and increase the chances that the US economy sees a decent economic recovery in 2010. –Paul Dales, Capital Economics

The concept of a public/private investment fund sounds intriguing, but there is no plan - the Treasury Secretary “seeks input” how to achieve this. There simply is no fair way to take bad assets off the books of financial institutions. The sooner policy makers not just recognize it, but embrace it in their strategy, the better… We did not see convincing evidence that the government is moving away from its Band-aid approach to helping banks. By now, the only viable solution left may be to nationalize the financial institutions that are deemed to big to fail; it’s then a political decision whether depositors should carry part of the cost. –Axel Merk, Merk Investments

I think the markets’ disappointment is excessive, and reflects overblown expectations more than weaknesses in the strategy. Geithner’s overall assessment of the gravity of the situation was realistic and candid, the strategy is sound, the government’s determination inspires confidence and the commitment to transparency and direct support to households and firms should ensure public and political support. The new Administration is moving in the right direction, but the markets will need to see more concrete steps before they can believe in this change. –Marco Annunziata, UniCredit Group

The “comprehensive” financial rescue plan — Financial Stability Plan — released by Treasury Secretary Geithner this morning is still missing significant detail, including an implementation date. There are far too many missing details to make this a satisfying announcement. Nonetheless — at first blush and without the benefit of key detail — the plan does appear to address the key problems of the financial markets at this point in time. –Ward McCarthy, Stone & McCarthy

The bad bank, which will be fleshed out over the next several weeks, will be extremely tricky to design effectively. At best, it will be modestly inferior to the solution of providing a guaranteed floor value for toxic assets without requiring banks to sell them to gain the protection. At worst, the plan may fizzle by failing to achieve a large volume of purchases or may prove considerably more expensive for taxpayers than anticipated. On the positive side, continuing to offer substantial capital injections to banks, despite the intense political unpopularity of those done under the Bush administration, shows a measure of political courage. –Douglas J. Elliott, The Brookings Institution

Compiled by Phil Izzo

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