http://krugman.blogs.nytimes.com/2008/09/20/no-deal/
September 20, 2008, 4:46 pm
No deal
I hate to say this, but looking at the plan as leaked, I have to say no
deal. Not unless Treasury explains, very clearly, why this is supposed
to work, other than through having taxpayers pay premium prices for
lousy assets.
As I posted earlier today, it seems all too likely that a "fair price"
for mortgage-related assets will still leave much of the financial
sector in trouble. And there's nothing at all in the draft that says
what happens next; although I do notice that there's nothing in the
plan requiring Treasury to pay a fair market price. So is the plan to
pay premium prices to the most troubled institutions? Or is the hope
that restoring liquidity will magically make the problem go away?
Here's the thing: historically, financial system rescues have involved
seizing the troubled institutions and guaranteeing their debts; only
after that did the government try to repackage and sell their assets.
The feds took over S&Ls first, protecting their depositors, then
transferred their bad assets to the RTC. The Swedes took over troubled
banks, again protecting their depositors, before transferring their
assets to their equivalent institutions.
The Treasury plan, by contrast, looks like an attempt to restore
confidence in the financial system -- that is, convince creditors of
troubled institutions that everything's OK -- simply by buying assets
off these institutions. This will only work if the prices Treasury pays
are much higher than current market prices; that, in turn, can only be
true either if this is mainly a liquidity problem -- which seems
doubtful -- or if Treasury is going to be paying a huge premium, in
effect throwing taxpayers' money at the financial world.
And there's no quid pro quo here -- nothing that gives taxpayers a
stake in the upside, nothing that ensures that the money is used to
stabilize the system rather than reward the undeserving.
I hope I'm wrong about this. But let me say it again: Treasury needs to
explain why this is supposed to work -- not try to panic Congress into
giving it a blank check. Otherwise, no deal.