Yes, Stiglitz is good too. Here's another of him on CNBC, although I haven't even had time to watch that one yet.
The broad outlines appear clear to me, but there's so many details that are not. The big banks are apparently insolvent. Krugman, who I've been disappointed with for backing TARP so strongly, was on The Newshour with Jim Lehrer last night saying some very hard things, including "all the big banks are insolvent." From my vantage point this message has finally broken through to the mainstream. Good.
The next step seems largely agreed upon, which is some sort of government organized bankruptcy. This will involve some sort of at least temporary government control of these banks, so will be "nationalization" in at least some sense of the word. Equity (that is stock) holders will be completely wiped out. Bond holders become equity holders. Some new capital will have to be injected (hopefully at that point and *not* before like the TARP give away.)
Something along this line might work, but will be very painful. One issue is with wiping out stock holders. This seems fair to me since nobody had to invest in these banks, and anyone who did was free to do the research and see that they really weren't good investments. So caveat emptor. Unfortunately a lot of funds, especially things like pension funds, are invested in banks. So it's not like wiping out stock holders is just damaging rich guys on Wall St. A lot of teachers and government workers and other people who can't afford the loses, will see their pensions devastated. And so we'll have to then help those people. But still I don't see any way around it.
The other unresolved issue for me is pricing. This is the same as Geithner's "stress testing" he talked about in his plan. We go into the banks, open the books, and figure out what they are really worth (or, how insolvent they actually are.) This is the key to restoring confidence in the market (in other words, this is the key to restoring the markets.) But pricing these complex synthetic mortgage products is going to be difficult. I haven't heard a plan for how to do this that doesn't open up a strong possibility of the prices all turning out to be $0. (Or, in other words, this is a tough market to price things in.) Still, it's the market we have, so I think we should mark the assets accordingly. But then how do we untangle who actually holds all these mortgages?
Tough stuff. There's going to be a lot of pain no matter what. But I think getting the truth (of the banks asset values) out into the open, even though this will mean bankruptcy in a lot of cases, is better done sooner rather than later. If we spend our money now hoping to not have to go that far, and then we have to go that far anyway, we'll need the money we just spent to recapitalize the "new" banks.
Blah blah. I'm just learning and so regurgitating here.
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The broad outlines appear clear to me, but there's so many details that are not. The big banks are apparently insolvent. Krugman, who I've been disappointed with for backing TARP so strongly, was on The Newshour with Jim Lehrer last night saying some very hard things, including "all the big banks are insolvent." From my vantage point this message has finally broken through to the mainstream. Good.
The next step seems largely agreed upon, which is some sort of government organized bankruptcy. This will involve some sort of at least temporary government control of these banks, so will be "nationalization" in at least some sense of the word. Equity (that is stock) holders will be completely wiped out. Bond holders become equity holders. Some new capital will have to be injected (hopefully at that point and *not* before like the TARP give away.)
Something along this line might work, but will be very painful. One issue is with wiping out stock holders. This seems fair to me since nobody had to invest in these banks, and anyone who did was free to do the research and see that they really weren't good investments. So caveat emptor. Unfortunately a lot of funds, especially things like pension funds, are invested in banks. So it's not like wiping out stock holders is just damaging rich guys on Wall St. A lot of teachers and government workers and other people who can't afford the loses, will see their pensions devastated. And so we'll have to then help those people. But still I don't see any way around it.
The other unresolved issue for me is pricing. This is the same as Geithner's "stress testing" he talked about in his plan. We go into the banks, open the books, and figure out what they are really worth (or, how insolvent they actually are.) This is the key to restoring confidence in the market (in other words, this is the key to restoring the markets.) But pricing these complex synthetic mortgage products is going to be difficult. I haven't heard a plan for how to do this that doesn't open up a strong possibility of the prices all turning out to be $0. (Or, in other words, this is a tough market to price things in.) Still, it's the market we have, so I think we should mark the assets accordingly. But then how do we untangle who actually holds all these mortgages?
Tough stuff. There's going to be a lot of pain no matter what. But I think getting the truth (of the banks asset values) out into the open, even though this will mean bankruptcy in a lot of cases, is better done sooner rather than later. If we spend our money now hoping to not have to go that far, and then we have to go that far anyway, we'll need the money we just spent to recapitalize the "new" banks.
Blah blah. I'm just learning and so regurgitating here.
- jim 2-11-2009 2:49 pm