Robert Kuttner Must Read: Lifting the TARP. Will Obama's Economic Team Lead Him Off a Cliff?

[flpoljunkie]

Lifting the Tarp: Will President Obama's Economic Team Lead Him Off a Cliff?

In the past two weeks, political support for the Tim Geithner/Larry Summers approach to solving the banking crisis has been unraveling in Congress, with blistering criticism from legislators of both parties.

The financial danger is that the Treasury will burn through the money approved by Congress without fixing the system. The political danger is that Republicans will posture as the populists, expressing faux-indignation that so much taxpayer money has gone to Wall Street. The overarching risk to Obama's presidency is that the plan won't work, and his political capital will evaporate along with the financial capital.

There is a whole other path to repairing the banking system, and a whole other set of experts, equally brilliant and better in touch with financial realities. But their unfiltered views are not reaching the president. This loyal opposition, of which more shortly, is not limited to lefties; it spans the ideological spectrum.

In the past decade, far too many of the banks' investments were far too speculative. They lost vast sums, which now exceed the value of their capital. In plain English, they are insolvent.

In a situation like this, a busted banking system can push the whole economy into prolonged depression. We are right on the edge of that condition, and there is little time to lose.

A modern RFC would be given the technical competence and manpower to audit just how bad things are. It needs to determine how far underwater is each of the large banks. (The top four hold about 55 percent of all deposits; fix them and you fix the system.)

The public corporation, according to Hoenig, would need to decide which banks to take into receivership, which ones have competent management teams, and which managers need to go.

Once the size of the hole in bank capital is determined -- and it will be on the scale of two trillion dollars -- the government needs to decide who eats the loss. How much do the taxpayers put in, and how much do the bondholders have to sacrifice?

Owners of bank stocks are not really relevant. They have already lost upwards of 95 percent of their investments. When a bank is taken into receivership, they will lose the rest. But it's no big deal for the system. Trying to use public money to pump up the value of bank stocks -- Geithner's approach -- has it backwards.

Finally, when the banks are restored to solvency, they need to be returned to private ownership.

more... Well worth reading in it's entirety...

http://www.huffingtonpost.com/robert-kuttner/lifting-the-tarp-will-pre_b_175149.html

[flpoljunkie]

1. More from Kuttner's article on the Geithner/Summers approach...

If you ask the question, how can we get America's banking system restored to health, the Geithner/Summers approach makes absolutely no sense. But if you ask a different question, it makes perfect sense: how can we pump up the share price of outfits like Citi and Goldman, while we pump in taxpayer and Federal Reserve money and hope for a miracle.

Unfortunately, a miracle is just what it would take for this approach to work.

[DemReadingDU]

3. That's it in a nutshell

They don't care about us, it's all about pumping up the shares of the banks.

[depakid]

2. The most disturbing part of this is the potential for Republicans to coopt the issue

The longer the economic team dithers- the closer this potential moves toward becoming acceptable reality to the public.

If the idea is indeed to not wipe out the shareholders, then make that case by who they are and why they deserve subsidies. Are they pension funds? University endowments? Important overseas investors (i.e. Chinese lenders).

Or are they mostly fatcats, bank employees and other more speculative types? My bet is the the VAST majority of the general public believes it's the latter.

[flpoljunkie]

4. Yes, the Republicans AND Lou Dobbs.

[KittyWampus]

10. that's what I thought last night (re: republicans coopting this). Our only hope is their stupidity

[Kurt_and_Hunter]

5. Maybe Obama will lead his advisors off a cliff... he's not an infant

Let's give the man some credit. He's a full grown man, not the baby Moses in the bull-rushes.

When Obama does something good it's all Obama. When he does something bad he's been led astray by his advisors.

It is simpler and more useful to consider Obama administration policy as a whole rather than personalizing its particulars.

For instance, the insistence on not taking control of the large money center banks is more a political decision than a money decision, and I have no reason to think that Barack blindly defers to economic advisors on political matters.

[flpoljunkie]

6. In the 'hoping for a miracle' category?'

If Obama does go with the Geither/Summers plan, we will all 'hope for a miracle.'

[KittyWampus]

11. Obama isn't an economist. He's an executive delegating responsibility. He isn't the one formulating

plans of action when it comes to the Economic crisis.

He's choosing which plan to follow and which voices to listen to.

He has chosen the wrong advisers and the wrong advice and with AIG telling him 'fuck you' this weekend regarding bonuses he and his team end up looking impotent and out of touch.

[debbierlus]

13. If almost everyone on this board could figure out where his appointments would take us

And, whom they represent...

Obama, a Harvard Graduate, and ultra smart strategist, he must have known what we all could see.

He picked Wall St representatives and insiders to represent Wall St, NOT the people.

It was a deliberate choice. None of this is in the least surprising.

Obama is a corporatist.

He hires representatives whom represent their interest over ours.

And, when you point that out to his supporters, you get a total blame the messenger thing. It is surreal to watch democrats defend the indefensivible just as Bush's flock did for him.

It should NEVER EVER EVER be about the politician. It should be about the POLICY. Look at the policy. Look at the action. If people would just follow this rule, we could unite for true change and not around a figure head.

[democracy1st]

23. bingo! I can't believe people can't see thru this bs...Geithner and Summers need to go asap

[truedelphi]

21. I really really hope he reads Robert Reich's blog (The one mentioning Volker)

Occassionally.

Everything Reich says is true - we really do need to put the worst off of the banks into receivorship under the FDIC, and sell off their assets. And with our taking them over rather than blindly, naively, stupidly propping them up, they won't exist in the name of the "Corporate Person": so they won't be able to keep breathing life into the odious contracts saying that the CEO's need their ten million dollar bonuses. And liek Reich says about AIG - Fuggitabt 'em.

Take 'em over and sell fof their assets and let the worst of the bad bets, er, investments
that went south should jsut stay south. Forever.

[debbierlus]

12. Bingo - somehow Obama can appoint corporate whores to these economic positions

And, he is just an innocent, hapless victim of circumstance...

Obama is a corporate frontman.

When progressives has to threaten to protest his health care summit to get a couple of seats at a 120 seat table, it becomes pretty obvious where he stands.

When he appoints the insiders from Wall St to oversea the economic rescue, it becomes pretty damn well clear who they are trying to rescue...

And, it is NOT the people.

Obama's election has completely fractured the progressive movement, as the unity against the Bush policies dissipates under the illusion of change. And, that is the real tragedy in this whole situation.

[Alcibiades]

7. "Geithner hopes to enlist hedge funds..."

"...and private equity companies to purchase bonds from banks, using loans and loan guarantees from the Treasury and the Federal Reserve, and thereby restart the very system that failed."

If you want financial stability, don't let the hedge funds assume control over the banks! If you want to maximize profit for well-connected insiders, though, this would be a good way to do it.

[flpoljunkie]

8. Your assessment, am afraid, is spot on.

[Adelante]

9. Thanks and I agree with that article

A modern Reconstruction Finance Corporation is what is needed.

[Better Believe It]

14. K & R

[truedelphi]

15. Thank you for posting this.

I fear that the economic meltdown and the way Geithner, Bernanke etc are handling it will prove to be Obama's Bay of Pigs. He will finally see the truth of it - but by then his political capital will have been expended, and our monetary capital as well.

[flpoljunkie]

16. Wish he'd take Robert Reich advice: 'Paul Volcker to Barack Obama'

Robert Reich: 'Paul Volcker to Barack Obama'

Mr. President, it's way too early to know exactly what the stimulus is doing because the money is barely out the door, but I've got to tell you I'm worried as hell. Unemployment is at 8 percent, and underemployment is over 14 percent of the workforce. The economy is shrinking much faster than it was when you put the stimulus together. It will be more than a trillion dollars short of its full capacity this year, and I have every reason to believe the same next. State governments alone are hundreds of billions in the hole, creating a huge drag. So your $787 billion over two years, only two-thirds of which is direct spending, isn't going to get us nearly far enough. I'd strongly recommend you make ready a second stimulus, about the same size, and get it enacted as soon as possible, with the proviso that it will be implemented if and when unemplyment hits 8.5 percent or underemployment reaches 15 percent.

Oh, and by the way, Mr. President. You may not want to hear this, but your Treasury Secretary is making things worse. His dithering on what to do about Wall Street, and his incapacity to speak clearly to the Street and to the public about what needs to be done, is spooking everyone. Why doesn't he just put the irrevocably insolvent banks into receivership under the FDIC, sell off their assets, protect depositors, and reimburse taxpayers with whatever remains? Let the rest of the banks fend for themselves -- working out their bad loans with their creditors. As to AIG, well, that's a complete basketcase. Put it out of its suffering. Take it over, sell its assets, protect policy holders (you'll need to create a big co-insurance plan with every other major insurer in the world), then get out.

http://robertreich.blogspot.com/2009/03/former-fed-chair-paul-volcker-is.html

[truedelphi]

17. That is a wonderful piece of advice for Obama. Question:

Is it from Reich or Volker??

[flpoljunkie]

25. Reich.

FRIDAY, MARCH 13, 2009

Paul Volcker to Barack Obama

Former Fed Chair Paul Volcker is briefing President Obama today on how well the stimulus package is doing. I have no inside knowledge of what he's saying, but if I were Volcker (and I'm not -- he's almost two feet taller than I am), I'd say the following:

[truedelphi]

29. Reich wrote a heck of a piece and I really loved it.

Sorry I initially skimmed over the one sentence, very clear intro, that explained it was what he would tell Volker.

[polichick]

18. Reich was great on Keith's show tonight - hope the President listens to him.

[truedelphi]

19. Robert Reich is perhaps one of the few people at the top who understands the

Working person's plight.

How he managed to stay inside the Clinton Admin. while not supporting their NAFTA Goals, I don't know. But he must be as crafty and foxy as he is wise. I really like the guy.

[Imagevision]

20. No one will lead Obama off any cliff (ha!) especialy with Michelle in the background

[jonestonesusa]

22. Excellent article - great advice.

I hope the model for changing the bailout plans reaches the president's ears. Let's help that happen with our voices!

[democracy1st]

24. Tim Geithner/Larry Summers have been officially exposed! I'm looking forward

to seeing the President get rid of these two. Has anyone in this admin talked about Glass Steagal
http://www.salon.com/tech/htww/2008/09/18/glass_steagall/

[D-Lee]

26. HEY stop forgetting TARP was republican!

The Dems are just stuck with administering it -- and investigating what is being done with it.

[jonestonesusa]

27. A number of Democrats also voted for it.

President Obama did as well - TARP had stronger support from Democrats than from Republicans. A stronger push from Democrats might have led to greater transparency. All of us live with the resulting legislation.

http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=110&session=2&vote=00213

http://blogs.abcnews.com/politicalpunch/2009/01/which-dems-vote.html

[polichick]

28. Sure is looking more and more like that team we weren't thrilled with to begin with...

...has lived up to our expectations.