Auros (auros) wrote,

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Financial collapse, and the civilizational variety.

This is a very important article. It's worth reading in its entirety, but I think this is the key message:

Typically, [countries that come to the IMF for help] are in a desperate economic situation for one simple reason — the powerful elites within them overreached in good times and took too many risks. . . . From long years of experience, the IMF staff knows its program will succeed — stabilizing the economy and enabling growth — only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit.

This is kind of the point of Jared Diamond's book Collapse: How Societies Choose to Fail or Succeed. If the elites who are able to make the big decisions about what activities a society invests in are disconnected from the consequences of their decisions -- if they are not held accountable for the risks they take -- they will inevitably risk the survival of the society. This is one of the biggest arguments for nationalizing the banks and wiping out the shareholders and managers who renedered them insolvent.

I posted a somewhat intemperate argument against Geithner's current actions a few days ago... (It also included a rant against the ConservaDems who are undermining the president's tax and budget ideas. I stand by that portion entirely.) Re: Geithner, I've since come to believe, tentatively, that he may have a good idea, if it serves as a glide path to nationalizing some of the banks.

Basically, the argument for the Geithner plan, as outlined by John Hempton, is that the plan is not big enough to be a solution, but is big enough to make the "stress test" mechanism work, because it will provide good pricing information to figure out the real value of the banks' balance sheets. I think Hempton's resistance to nationalization is overwrought, but he does have a point that creating a clear, predictable method of understanding which banks are being nationalized, and which aren't, will help reduce uncertainty in secondary credit markets.

You have to consider whether you think the amount of money being put at risk, through the FDIC -- which may be recoverable through higher insurance premia to the banks later, or may come out of the taxpayers' pockets -- is worthwhile, to establish this fair/predictable mechanism and reduce worries in the credit markets. If the plan really does cause long-term interest rates to drop another few points, helping out folks (including the state and federal gov'ts) who want to invest in infrastructure, new manufacturing capacity for cleantech, and so on... then I'd have to admit that, yeah, it probably is worthwhile.

I'm still concerned about the fact that this pricing mechanism probably has an upward bias. In theory, though, the stress-testing could account for this, discounting the prices discovered in this market by say, 20-30%.

So, if Geithner actually uses the market as a mechanism for pricing bank assets and then nationalizing the insolvent ones, I will take back any bad things I have said about him. But given that he (and Obama) appear to be in thrall to the idea that nationalization is un-American and that Wall Street knows best how to fix itself, that's an awfully big if. We can pray that they are merely buying time, planning to execute the eventual nationalization over a long weekend, preventing much market chaos in the process.

ETA: In unrelated news, Paul Krugman is on the cover of Newsweek, and has accordingly issued a warning that, in light of the Magazine Cover Curse, he no longer trusts himself. As he once wrote, "Whom the gods would destroy, they first put on the cover of Business Week."

ETA: There's a fairly exhaustive set of links to various arguments for and against Geithner in this post, which I found because Krugman responded to the argument in it.

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