Stiglitz Criticizes Bad Bank Plan as Swapping ‘Cash for Trash’

[Joanne98]

Source: Bloomberg


Feb. 1 (Bloomberg) -- Nobel laureate Joseph Stiglitz said any decision by President Barack Obama to establish a so-called bad bank to rid financial companies of toxic assets risks swelling the national debt.

Obama’s administration is moving closer to buying the illiquid assets currently clogging bank’s balance sheets and preventing them from boosting lending, people familiar with the matter said this week.

That amounts to swapping taxpayers’ “cash for trash,” Stiglitz said yesterday in a panel discussion at the World Economic Forum in Davos, Switzerland. “You shouldn’t chase good money after bad. We’re talking about a national debt that’s very hard to manage.”

Stiglitz, a professor at Columbia University in New York and a former adviser to President Bill Clinton, says the plan would leave taxpayers paying for years of excess lending by banks. It would also deprive the government of money that would have been better spent shoring up Social Security, he said.



Read more: http://www.bloomberg.com/apps/news?pid=20601087&sid=aKrRkAwxNhTw&refer=home

[lumberjack_jeff]

1. If trash is redeemable for money what does that imply about the value of dollars?

It's a risky deal.

[Waiting For Everyman]

2. I guess Stiglitz isn't one of the people hoping for a mortgage modification.

The bad bank is to get control of the mortgages etc. which the banks refuse to modify so far, so that they can be modified. I guess that's a worthless thing to do, according to him.

But then, he's at Davos so that says a lot.

[PaulaFarrell]

19. I think you misjudge him

From what I have read that he has written, he is a very humanitarian guy, much more so than Larry Summers.

Maybe he just honestly believes it won't work. Surely there's other ways to get mortgages modified, i.e. just pass a law to make banks do it under certain circumstances. Seems like new laws and regulations would do a lot to help in this crisis, besides just throwing money at the problem.

[On the Road]

3. I Agree

I prefer the existing TARP program to the bad bank proposal *or* the original plan for the government to buy troubled assets. I would rather have the government commit a larger amount to partial ownership of the banks than a smaller amount to buying just the bad loans. Investment in the banks allows taxpayers to benefit from the hoped-for future recovery of the industry rather than being left holding the bag.

[closeupready]

4. In addition, it effectively rewards bad business decisions by the financial "experts"

So if we believe in free markets, as Obama does, exactly WHAT is the disincentive to yet MORE bad decisions (which may make bankers rich in the short-term)???? As far as I can see, there ARE none. Make bad decisions that make you rich, watch your bank start to fail, and the government will step in with money taken from the taxpayer to the tune of tens of thousands of dollars for each taxpayer when many of them are having problems paying mortgages, going without healthcare, even having issues buying food. :mad:

[D-Lee]

5. Take a good look at the "mark to market" rule first

Some of the problem with bank capitalization is an artificial market impact -- the mortgages underlying many mort age CDOs ARE being paid, but the market for mortgage CDOs has collapsed and eroded their value nonetheless.

Such mortgage CDOs are grossly undervalued -- and not reflecting their real-world actual return.

It might be a good idea for people more knowledgeable than I am to look at tweaking the "mark to market" rule, even temporarily, to alleviate the impact of this type of CDO.

One could even create just an alternate measure of value for specified CDOs.

That could be a cost-free way to alleviate some of the problems with bank and investment portfolio valuation. Every little bit helps!

[notesdev]

14. That's the problem with leverage

If you're leveraged out 25, 30+ to 1, it only takes a few percentage points' drop in the market value of the underlying assets to make the entire enterprise insolvent.

Not a good foundation to base an economy on, IMHO. Leverage is powerful on the way up, but absolutely devastating on the way down.

[w4rma]

6. Let the banks that did this go bankrupt. And use the money towards new banks. (nt)

[notesdev]

15. That makes so much sense

that there is zero chance of it actually happening. Instead, we'll bleed more and more and more money as we learn about all the various ways in which these finance 'wizards' managed to lose money.

I don't even think the largest of the figures currently being discussed ($4T) is even close to the depth of the mess those guys created. I think we're looking at numbers, on the low end $50T, and on the high end maybe 10 times that number.

Bottom line: there is no possible way to pay off all the debts created by these educated menaces. Cutting our losses and making new institutions to replace the failed ones is the only intelligent path to recovery.

[defendandprotect]

16. NATIONALIZE those banks . . . STOP bailing out capitalists -- !!!

[w4rma]

22. I don't even want them nationalized any more. I just want them to fail while their competition takes

all of their business. Nationalize the competition, instead.

[Still Sensible]

7. I disagree, if there are some assets

tied to what is being bought up, the government (taxpayers) have some opportunity to recoup those investments. Isn't that what the original TARP funds were supposed to do? That is before Bush and Paulson said, oh, wait a minute and pulled the switcheroo?

I'm sorry Mr.Stiglitz pet issue isn't being addressed, but I think he's wrong on this one. He sounds like one of those old-time republicans who preaches that deficit spending is the root of all evil. I thought Reagan burst that bubble for them two decades ago.

[Cronopio]

12. Stiglitz has made it clear in past articles that he is not against raising the debt level ...

... at this time. Which is why I'm sure that he was misinterpreted in this article.

[Jambalaya]

8. Stiglitz is a homie

Stiglitz's hometown is Gary,Indiana.As noted above,he was an advisor to Bill Clinton. Indeed, he devised much of the successful Clintonian economic policy.

For an anecdote of irony,when Hillary was campaigning last year,she was in Gary,Indiana decrying that "economists' didn't know anything about real Americans ;,or the real economy re" gas tax holiday! Remember that one?

Oh,indeed,politics make VERY strange bedfellows !

[PSPS]

9. He's exactly right and I was flabbergasted Obama floated this bush-like proposal.

[Cronopio]

10. Stiglitz is right on the money.

If Obama is backing the "bad bank" option, his stimulus plan will fail. They need to go the "RTC-type bank" route where the banks are liquidated and the assets resold. The only reason anyone is considering the "bad bank" option is because the bank investors want to retain control.

[JFKfanforever]

21. You said it! Stiglitz is right on the money here...

He always is!  
{I always have my students read Stiglitz's simple insightful
analysis of the IM and globalism --

http://www.chicagotribune.com/news/nationworld/chi-renditions_31jan31,0,2998929.story
}

[pa28]

11. I'm sure that went over really well with the Davos crowd.

They seem to feel that U.S. taxpayers are obligated to pony up for the sable lining in their coats.

I think he's absolutely right though. I'd rather nationalize the big banks: the aggregator bank seems to be the chosen solution of those who got us into this in the first place - reason enough to be skeptical and take a good hard look at who benefits, who loses and what the ultimate cost will be.

[notesdev]

13. What a "bad bank" is

is the government using YOUR money to buy junk-grade assets at a price no sane person would ever pay.

Considering that we the people seem to be the only source of money left, our representatives ought to be negotiating a much better deal than this. It is, after all, a buyer's market, and if the price isn't good enough we should be prepared to walk.

As far as moral hazard goes, that chicken has flown the coop. The only way to even begin to restore any sense of integrity in the financial sector is to prosecute large numbers of the ringleaders of these pump-and-dump investment schemes that gobbled up the health of the economy.

[defendandprotect]

17. This many BAD ideas isn't going to make ....

for positive change . . .

I mean, the least of us can see this ---

We need to get organized on Single Payer Health Care --- !!!

and on ALL of these BAD ideas --- !!!

[flyinzamboni]

18. It doesn't take a nobel prize winner...

I much prefer the "mafia theory" of regulation which I think the Fed should be using in this case: the bank regulator walks into the lobby of the bank and up to the manager and says, "That's a really nice bank you've got here. It would be a shame if something should happen to it."

I definitely agree that this is about liquidity, de-leveraging, and the people in control of the banks wanting some piece when they probably should not get any (whether it be the executives or the shareholders). There are banking regulations and the fed needs to enforce them and that might result in a banking renationalization for at least a while. That is a much better alternative in my mind than throwing money at them for years which only delays such drastic action.

[terisan]

20. They banks don't need "walking around money." They are bankrupt. They just need to walk away.

If we have to pick up the garbage why would we pay them for the questionable privelege?