What Geithner Still Needs To Do
By Robert Reich - February 10, 2009, 12:42PM
Tim Geithner had to do two things this morning: (1) raise public
confidence in the whole idea of bailing out the banking system,
enough to allow the administration to use the second $350 billion Congress
has already authorized without too much hollering on Capitol Hill; and (2)
raise the confidence of capital markets sufficiently to get investors to
buy the banks' toxic assets (with guarantees from the Treasury and loans
from the Fed limiting the investors' downside risks), and to buy new
securities that will finance loans to consumers, small businesses, and
homeowners (also with some federal guarantees and loans limiting downside
risks).
At this point, (1) is far easier to accomplish than (2).
The public doesn't trust Wall Street and has big doubts about the
Treasury, even under Obama. But the administration isn't asking for new
legislation now. The entire program is based on existing authority. Just
as well, because Congress is still grappling with the $800 billion-plus
stimulus, and it's unlikely that Republicans and Blue Dog Democrats would
be willing to shell out even more taxpayer dollars at this stage.
In Geithner's plan, most of the heavy lifting will be done by the Fed. Fed
loans will, it's hoped, limit investor risk enough to entice them into
"partnership" with government. Most members of Congress and 99.9 percent
of the public are unaware that the Fed has already committed over $2.5
trillion to get credit markets moving again, but with limited results so
far. There's scant oversight of the Fed, and the Fed's dealings don't show
up as additions to the federal budget deficit. (Yes, we live in a
democracy, but not when it comes to the Fed.)
But achieving (2) presupposes there's enough private investment capital
still out there to do all this. But where is it? Some at Treasury tell me
that they're counting on hedge funds. But that's merely exchanging one
form of opaque financing (the old TARP) for another (hedge funds' black
boxes). It's a dangerous gamble because hedge funds could fall apart just
as quickly as other parts of the financial system have failed. Maybe they
already have, for all anyone knows. They're secret, remember?
Or maybe the additional financing will come from China, Japan, and the
Middle East. (It seems likely that some hedge fund financing is already
coming from rich Arabs.) But why exactly would Asia or the Middle East be
willing to commit even more money to the United States when they're
already nervous about their US loans and investments, and when their own
economies are under more and more stress?
Geithner was vague about all this, this morning. That's understandable.
But the vagueness works against him in terms of both objectives. The
public wants specificity in terms of where the second tranche of TARP's
$350 billion is going. More to the point, investors (whoever they are)
need lots of specificity before they're going to put up a single dollar.
http://tpmcafe.talkingpointsmemo.com/2009/02/10/what_geithner_still_needs_to_do/
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'Cause he has the poison darts aimed at our Prez.
