Why Obama’s new Tarp will fail to rescue the banks

[bijou]

Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.

What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.

Yet hoping for the best is what one sees in the stimulus programme and – so far as I can judge from Tuesday’s sketchy announcement by Tim Geithner, Treasury secretary – also in the new plans for fixing the banking system. I commented on the former last week. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome.

The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this “progeny of the troubled asset relief programme” fails, Mr Obama’s credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.

All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.

Under the first view, the prices of a defined set of “toxic assets” have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the “super-SIV (special investment vehicle)” proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007.

Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn (€1,700bn, £1,500bn), up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn. Fortunately for the US, half of these losses will fall abroad. But, the rest of the world will strike back: as the world economy implodes, huge losses abroad – on sovereign, housing and corporate debt – will surely fall on US institutions, with dire effects.

Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so. But this is not the heart of the matter. That is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalised financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government. This choice is surely a “no brainer”. ...more...

http://www.ft.com/cms/s/0/9ebea1b8-f794-11dd-81f7-000077b07658.html?nclick_check=1

[Baruch Menachem]

I am not surprised at Obamas leadership in the crisis so far.   Most of the time he was in the Senate both in IL and in the US congress, his most constant vote was present.   He has no real interest in moving in any direction at all.

I am one of those who thought of him as another Hitler/Stalin wanna be.  That seems less and less to be the case.  He does seem to want to bring all power levers to himself, but more to admire them, than to do anything with him.

also Hitler had some folks who were on the ball.  (I think Stalin did too, but they got erased over time and sent down the memory hole)  Schacht actually had some good ideas that did move Germany forward for a time.


Geitenr seems even more confuddled than obamba over what to do.

So the next four years will be very interesting.  Sort of like the Carter years on steroids.

[Peter3_1]

I'M WORRIED THAT Mr. Obama will spend his presidency profiling, pointing, mugging and reading (exceptionally well) off a teleprompter the words of others. WORK needs to be done. Not the least of which is `JAWBONING the health, strength and viability of this nation. Then, he'd better reform this legislation into something that has a snowball's chance of working. What has been doen has almost a ZERO chance of working, and most likely will retard the recovery.