A Poor Banking Solution (Mallaby)
The plan is being marketed under false pretenses. Supporters have invoked the shining success of the Resolution Trust Corporation as justification and precedent. But the RTC, which was created in 1989 to clean up the wreckage of the savings-and-loan crisis, bears little resemblance to what is being contemplated now. The RTC collected and eventually sold off loans made by thrifts that had gone bust. The administration proposes to buy up bad loans before the lenders go bust. This difference raises several questions.
The first is whether the bailout is necessary. In 1989, there was no choice. The federal government insured the thrifts, so when they failed, the feds were left holding their loans; the RTC’s job was simply to get rid of them. But in buying bad loans before banks fail, the Bush administration would be signing up for a financial war of choice. It would spend billions of dollars on the theory that preemption will avert the mass destruction of banks. There are cheaper ways to stabilize the system.
In the 1980s, the government did not need a strategy to decide which bad loans to take over; it dealt with anything that fell into its lap as a result of a thrift bankruptcy. But under the current proposal, the government would go out and shop for bad loans. These come in all shapes and sizes, so the government would have to judge what type of loans it wants. They are illiquid, so it’s hard to know how to value them. Bad loans are weighing down the financial system precisely because private-sector experts can’t determine their worth. The government would have no better handle on the problem.
In practice this means the government would make subjective choices about which bad loans to buy, and it would pay more than fair value. Billions in taxpayer money would be transferred to the shareholders and creditors of banks, and the banks from which the government bought most loans would be subsidized more than their rivals. If the government bought the most from the sickest institutions, it would be slowing the healthy process in which strong players buy up the weak, delaying an eventual recovery. The haggling over which banks got to unload the most would drag on for months. So the hope that this “systematic” plan can be a near-term substitute for ad hoc AIG-style bailouts is illusory.
Sebestian Mallaby
A Bad Bank Rescue in The Washington Post (September 21, 2008, B07)
This entry was posted on Tuesday, September 23, 2008 at 7:31am. It has been filed under Business, Media, Quotes, News, Money, Politics, Writers, Joshua.
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Okay. So only one person has cared enough to leave their two cents. How depressing! Especially considering all the trouble I went through posting this in the first place. Well you can leave a comment if you want. It might cheer me up.
Ugh, I’ve been NOT following this just enough to keep from getting depressed. I will say that this action could undo any Republican chances in November. Most of the blame for this will be laid at the feet of the Bush administration (regardless of what deregulation happened under Clinton) and extended by association to McCain - perhaps deservedly so.
Part of me would like to think that someone knows something I don’t about the ramifications if we don’t do this. But that’s seemingly less likely. I almost would buy that line for Fannie/Freddie. It was a bit harder to swallow for AIG, but this I just don’t understand. I heard an NPR reporter ask a telling question in an interview yesterday. She said, “So, do the failings of the financial sector [not the bailouts, mind you] mean that the idea of a free market is dead?” I don’t remember the answer, but the funny thing is that the free market is doing EXACTLY what it should do. It’s correcting. People on all levels are getting hammered for mistakes they and others made. And now, those in business and the top levels of the government are trying to prevent that correction. They want the free market on the upswing and want golden handcuffs if they get in trouble.
I still don’t have much sympathy for people who bought more house than they could afford, but I have even less sympathy for those that provided the loans. They gambled. And they should lose. Sadly the buyout seems like it will be a great deal for the financial system. An undo of sorts. “Whoops, this didn’t really happen.” Except that it did. And expanding government is easier than shrinking it. And none of it penalizes many of the companies or officials that need to be penalized. And we all get to pay for it (or at least, our kids do). Frankly, for those who believe in small and fiscally conservative government, this smells of the very socialist ideal: the government can save us. But it can’t.
Grant wrote on Tuesday, September 23, 2008 at 1:36pm.