Outlook Well done, I suppose, but where's the detail, and is it enough? Tim Geithner's speech to Congress yesterday outlining his financial stability plan was superficially authoritative and confidence-inspiring. The new US Treasury Secretary used bold and grand language to describe what had gone wrong and how to fix it. He also dumped majesterially on the previous administration. His predecessor was blamed for repeated policy failings – too little, too late – which had only succeeded in making a bad situation even worse.
Yet isn't Mr Geithner in danger of falling into exactly the same trap? Look beneath the rhetoric, and there was nothing particularly new in the plans outlined yesterday. There's to be more capital for distressed banks, what remains of the Troubled Asset Relief Programme (Tarp) money is to be used to fund a "bad bank", which in partnership with private money will buy up toxic assets. Building on a scheme which already exists, up to $1 trillion will also be made available through the Federal Reserve to buy up packages of loans in the hope that this might restart the securitisation process which provides the backbone of American credit. We should perhaps await the detail before passing judgement – though everyone was actually expecting it with the statement yesterday – but none of this looks enough to do the trick and get credit flowing again.
Mr Geithner warned that there would be mistakes along the way, and that whatever he did would be costly and risky to the American taxpayer. Yet he may have to steel himself for taking on a lot more risk still if he is ever to get on top of this crisis. A number of major banks may have to be nationalised outright in order properly to restructure them and allow "good banks" to emerge that can once more borrow and lend in the normal way.
Markets were understandably disappointed with the Geithner plan last night. He promised to get ahead of the curve, yet few thought he had managed it. The bad bank plan continues to suffer from the same flaws that bedevilled the original Bush proposal – namely that it looks too small, and has not yet figured out an equitable method for pricing the assets. If an inflated price is paid, it's just a subsidy from the taxpayer to the banks, and if too little is paid, it makes the banks look even more insolvent than they already are.
The US Treasury hopes to attract private money into the scheme by offering to underwrite the assets for a premium, but would not a neater solution to the problem have been to offer the insurance direct to the banks, in the same way as the UK Treasury is doing here in Britain?
Who knows? It may end up working. But it would be unwise to count on it. In the meantime, Mr Geithner risks repeating the mistakes of his predecessor, in being seen constantly to retreat before the advancing deluge as each newly constructed dyke is breached. The lesson of all previous banking crises is that the problem isn't properly lanced until the system is fully cleansed. There can be no confidence in balance sheets until the suspect assets are fully removed.
Ideologically, Americans are vehemently opposed to nationalis-ation, much more so even than Britons. But when there is so much money already being used propping up the banking system, what's the difference? At least outright national ownership ensures adequate public control of the funds, much of which to date seems to have found its way out of the back door in bankers' pay as fast as it is being paid in through the front. Mr Geithner promises this won't happen in future, but again, I wouldn't bet on it.Reuse content