If the Geithner toxic-asset-removal plan doesn't work as intended -- and there's no guarantee that private-sector participants will step forward in sufficient numbers -- or if the stress tests were not strict enough, missed essential risks, etc., and some of the banks are in much worse shape than we thought, will policymakers be willing to change course? Or will they continue to avoid the more costly but arguably more effective solution of nationalization, cite the stress tests as evidence that banks are relatively healthy and continue to string banks along through a series of capital injections in the hopes that the PPIP will eventually work?
It's been convenient for all involved to say that the legal authority for putting these banks through bankruptcy (nationalization) does not exist, so we have little choice but to stick with the PPIP and hope it eventually works, but Congress could change the law quickly to grant the necessary authority if it really wanted to. But it prefers to avoid the more costly, yet more certain, step and invest in hope instead.
Policymakers have a lot of time and effort and their own reputations wrapped up in the PPIP program, and they do not want to pursue costly solutions given the state of the federal budget. So they will not abandon the current course easily, something that today's testimony made clear.
For that reason, I hope I am wrong about the stress tests and they really do tell us about the health of banks instead of mainly providing political cover, and that the PPIP works better than we could have hoped. Because if it doesn't, we won't save a thing by following in Japan's footsteps and sticking with programs that only prolong the inevitable.
-- Mark Thoma is an economist at the University of Oregon and blogs daily at Economist's View.
No comments:
Post a Comment