http://www.businessinsider.com/henry-blodget-geithners-three-big-misconceptions-2009-3 Geithner's Five Big Misconceptions Henry Blodget|Mar. 23, 2009, 9:02 AM|45 PrintTags: Economy, Tim Geithner, Treasury, Editors' Picks, Barack Obama, FDIC, Financial Crisis, Debt Tim Geithner has finally revealed his plan to fix the banking system and economy. Paul Krugman, James Galbraith, and others have already trashed it. Why? In short, because the plan is yet another massive, ineffective gift to banks and Wall Street. Taxpayers, of course, will take the hit. Why does Tim Geithner keep repackaging the same trash-asset-removal plan that he has been trying to get approved since last fall? In our opinion, because Tim Geithner formed his view of this crisis last fall, while sitting across the table from his constituents at the New York Fed: The CEOs of the big Wall Street firms. He views the crisis the same way Wall Street does--as a temporary liquidity problem--and his plans to fix it are designed with the best interests of Wall Street in mind. If Geithner's plan to fix the banks would also fix the economy, this would be tolerable. But no smart economist we know of thinks that it will. We think Geithner is suffering from five fundamental misconceptions about what is wrong with the economy. Here they are: The trouble with the economy is that the banks aren't lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it. As consumers retrench, companies that sell to them are retrenching, thus exacerbating the problem. The banks, meanwhile, are lending. They just aren't lending as much as they used to. Also the shadow banking system (securitization markets), which actually provided more funding to the economy than the banks, has collapsed. The banks aren't lending because their balance sheets are loaded with "bad assets" that the market has temporarily mispriced. The reality: The banks aren't lending (much) because they have decided to stop making loans to people and companies who can't pay them back. And because the banks are scared that future writedowns on their old loans will lead to future losses that will wipe out their equity. Bad assets are "bad" because the market doesn't understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are. House prices have dropped by nearly 30% nationwide. That has created something in the neighborhood of $5+ trillion of losses in residential real estate alone (off a peak market value of housing about $20+ trillion). The banks don't want to take their share of those losses because doing so will wipe them out. So they, and Geithner, are doing everything they can to pawn the losses off on the taxpayer. Once we get the "bad assets" off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they'll sit there and say they are lending while waiting for the economy to bottom. Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they'll be working it off for years. House prices are still falling. Retirement savings have been crushed. Americans need to increase their savings rate from today's 5% (a vast improvement from the 0% rate of two years ago) to the 10% long-term average. Consumers don't have room to take on more debt, even if the banks are willing to give it to them. The two charts below from Ned Davis illustrate the real problem: An explosion of debt relative to GDP. The first is Nonfinancial Debt To GDP. The second is Total Debt To GDP. In Geithner's plan, this debt won't disappear. It will just be passed from banks to taxpayers, where it will sit until the government finally admits that a major portion of it will never be paid back.
These are the words of Henry Blodget. I suggest before you rant you read. For what it is worth, I tend to agree with Blodget. People are hoarding their money, job losses have choked sales across the board, and a rise in unemployment continues to spook bank lending. Geithner, who is running this show right now may be Treasurer by title but he is clearly doing an awful job of it. The guys running these banks, they are not doing exceptionally well either.
I could well be mistaken, but it seems to me this plan and the bailouts in general are similar to the approach we rightly criticized the Japanese for using during their "lost decade." They let banks pretend they were not insolvent by carrying bad loans at artificial values and they printed money to try to somehow reinflate the bubble economy. Didn't work for them and is unlikely to work for us.
Roach, there is one point in that article i have trouble accepting and that is devaluation of long term mortgage bonds based on the current value of the underlying real estate. Even if the underlying has declined in current value by 30%, the value of the bond should not go down 30%, but only some fraction of that based on increased risk. Those of us who live in mortgaged homes do not wake each morning and check the value of our homes, and if we live in them many years we know that the value will fluctuate up and down with the current market; yet we still make the same payment on our mortgage each month! The real value of our mortgage is determined by our ability to pay, which is only very tenuously linked to the underlying value. True, as the value of our house goes down the risk to the mortgage holder goes up, but nothing like in direct proportion to value. I think Geitner is right on this point. The problem is mark to market accounting being used on assets that are not suitable for mark to market. At worst, the average devaluation of the illiquid CMO's out there is in the neighborhood of 10%, and nowhere near the 30% that house prices have declined in some markets. A better solution to the problem of illiquid mortgage assets, IMO, would have been to leave the illiquid assets with the banks, but permanently find a more appropriate accounting method to compute value. It's rather ridiculous to use mark to market when a liquid market does not exist!
I tend to agree with you on that. Unless I lose my job and cannot find employment to replace my unreal overhead (I have 3 kids), I will make my monthly payment, regardless of my valuation. I did like Blodgets article though, the point I truly believe and have preached is the consumer ability and desire to debt load anymore than they have.
destroyerofall-your own brain cells. Typical ET douchebag with 20 different ID's. You sound like one of stock turd3rs army. I got 3 words for you: GOAN!
You are mistaken. Japan was VERY slow to react. The BOJ lowered rates to zero and the govt. repeatedly boosted spending to stimulate the economy. Nothing succeeded, until the govt. removed non-performing loans from the banking system. They were extremely slow in carrying out any kind of stimulative measures. And when they finally did so, they prematurely reversed some policies which had had some earlier success. Amazing as it seems, Japan didn't embark upon recapitalizing it's banking system until 1998, a full 8 years AFTER the Real Estate Crash! They also foolishly crippled their attempts at reflation with a bone-headed increase in a consumption tax in 1995 from 3 to 5%! This created yet another shock to the economy which was still trying to get its "legs" under it. Japanâs lost decade can be divided into three sections: the 1991-93 recession, the temporary recovery of 1994-96, and the deep recession of 1997-99. Each episode offers important lessons. In fact, Japan's nominal GDP growth rate was BELOW ZERO for most of the 5 years AFTER 1997. The BOJ didn't even embark on its policy of "Quantitative Easing" until the Spring of 2001. Talk about sitting around doing nothing while Rome burns . . .
Thank you, Landis, for making these points. I've grown weary of these "Japan's already tried it, and it failed" remarks by uninformed ET posters.