UNWELCOME UNCERTAINTY…. Just nine days ago, Paul Krugman had heard rumors about what might be in Treasury Secretary Tim Geithner’s financial rescue plan, and wrote a column blasting some of the possible provisions. Today, we learned at least a bit more about Geithner’s agenda, and Krugman doesn’t seem quite as discouraged.
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.
What is in it, in reverse order:
1. Super-TALF: a big expansion of the Fed’s quantitative easing, with Treasury backing. I’m OK with that.
2. Private-public purchases of questionable assets; as I understand it, private investors would be the junior partners, so this is probably not a big giveaway (unless there’s huge public financing, in which case it amounts to ring-fencing after all). I also suspect it wouldn’t accomplish much, but no harm, no foul.
3. Stress test: everything depends on how this is actually implemented. What happens if, or more likely when, a major money center bank is stress-tested and found to have negative net worth? One possibility is that the auditors are told to come up with a different answer; that’s a big concern. The other is that the bank is effectively nationalized; as I read the language that could be achieved as part of the public capital injection.
I obviously can’t read Krugman’s mind, but I get the sense his reaction to the policy can be summarized as, “Coulda been worse.”
The broader problem, though, is that Geithner’s speech didn’t resolve much. In fact, looking over the reactions to the plan, there’s apparently one point of agreement: Geithner still hasn’t actually outlined a concrete plan. He has some ideas, some beliefs, and a few good things to say about transparency, but the Treasury Secretary’s speech was supposed to answer questions. Instead, it raised quite a few.
Krugman sounded cautiously optimistic, but conceded he doesn’t “really know” what the plan is. That’s a surprisingly common sentiment — Simon Johnson, the former chief economist for the IMF, said, “This is not a plan. In the annals of plan-announcing, this is very vague.”
Johnson added that “The market is responding to vagueness.” Yes, and it’s not responding very well.