I’d say Simon Johnson has it about right when he says the G7 are asleep at the wheel. A combination of mild squabbling and feel good statements about how wonderful Geithner is can’t conceal the fact that they don’t actually have anything like a unified plan of action.
Part of the issue seems to be that no one is taking control and leadership. Geithner’s plan is too vague to point the way for other nations, or even for the US. If he’s really planning on taking bold steps such as putting banks that fail his stress test into receivership or nationalizing them, that’s simply not clear from his proposal.
Nor have any other of the G7 nations been acting in more than an ad-hoc fashion. No one really has a plan, and everyone is muddling through because no one is willing to admit the simple fact: that the majority of the world’s largest banks are bankrupt.
The Geithner plan may back into this admission through its stress test, but who knows? As it stands right now, the plan seems to actually say, in effect "we’ll use the stress test to figure out how much money we have to back the bank with":
While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital.
If that’s an all out commitment, something Geithner appeared unwilling to commit to during Congressional hearings, then it is actually a plan (a bad plan, but a plan). If it’s not an absolute commitment, then it still leaves the fate of bankrupt banks up in the air.
The other question is transparency. The Geithner plan talks a lot about it, but it’s unclear whether the full results, including methodology of the Stress Tests, will be made public. If they were, that would go a long, long way to reassuring private funds. The problem right now with ponying up money to help a bank is that you don’t know if you’re getting a bargain basement price for something which could recover, or a pig in a poke. That won’t change unless you have real transparency.
The problem with real transparency, though, is that it’ll also make clear which banks are effectively bankrupt, and could cause a run on them. (Which is why you should declare a bank holiday and have the FDIC lined up before releasing the results). But stress tests which aren’t made public won’t reassure investors, they just amount to the Treasury saying "trust us" and at this point no one does. Full numbers including methodology have to be released or the stress test will be useful only to the Treasury and the Fed for their operations and not to private capital.
Geithner also wants to take preferred shares instead of common shares in exchange for whatever aid he gives banks. Again, this is a refusal to deal directly with the problem. The problem in this case being bank management: a corporation which is bankrupt should not keep the management which bankrupted it, but so far the government has mostly refused to wipe out the financial executive class.
Likewise it fails to look squarely at the problem of returns to taxpayers. If the government is going to back up insolvent banks to the hilt, it might as well take common shares or outright nationalize the banks in question, so it has all the upside of any later appreciation. Doing anything else means taxpayers won’t get as much money back as they could otherwise, and indicates that looking after bank executives is still a significant concern, competing both with returns for taxpayers and simple effectiveness.
If the problem is banks not lending, as we keep being told, the simplest way to make sure they lend is to put our own CEOs, boards and executives in charge. Once they’re in place, if the bank can conceivably lend, we can be sure it will. This cuts through the bank blackmail of "take all our bad debt of our hands, or the economy gets it" because the executives making the blackmail threat will be gone.
One of my longest running rules of analysis has been the "will they do what is necessary" rule. Not "is it possible to fix it" but "is anyone in a position of power willing to do what it takes to fix it?" So far we have a stimulus bill that is too small, a G7 that is dithering and a Treasury secretary unwilling to beard the bank executives to save the country.
In the Great Depression the country suffered years of hand wringing and ineffective policy before it elected FDR, who was willing to do what it took and had a Congress in which both parties were begging him to do so. I hope we aren’t going to have to wait that long this time for those in power to take the bull by the horns and start putting the country and ordinary citizens first.
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Why take any shares? Why not take the assets if there are any, and hire new management and begin banking under strict regulation and controlled interest rates. The gov will insure all depositors.
The toxic “assets” or paper are the way the banks speculated in the market to make money for their investors. Who cares? Toss them in the incinerator.
Who takes a bath? Investors in banks? Who cares? Those who would invest in such corrupt institutions are not worth saving. Screw them.
There are ethical investments and they are not in the financial sector. If you haven’t invested ethically than you get to lose your chips. Dumb you. Be ethical next time around.
Thanks Ian.
Digg is open
Which of the top ten lies will the “stress test” replace? How soon before the “stress test” is fodder for late night TV and SNL?
Ian,
Do you believe that THIS banking system can be fixed? That is the question.
Underlying IT is the fractional reserve banking which we know is what causes all credit and asset bubbles.
Will anyone scrap fractional reserve banking?
On the most fundamental level we cannot get on without some form of credit. We do need loans for large capital projects (relative to the borrower’s current cash assets). But we can have a system where the loans are reality based, cannot be securitized and are simply like a public utility which is required for commerce. NOT A GROWTH INDUSTRY. Not the largest “industry/revenue sector of the GDP.
We need to not be the bankers to the world, but the providers of goods and services to the world or ourselves!
End the banking system, don’t fix it.
In the clip with Simon Johnson on Bill Moyers, watch the segment with Bernie Sanders from Vermont when questioning Geithner as to why those heading the banks and have allowed this financial train wreck to take place are still there after receiving bailout funds from the American tax payer. Never saw Bernie quite as upset as he was. But this gives you and idea along with Johnson’s interview just how bad things really are.
If you look at those figures that Obama has placed around him to address these very pressing issues, they are the same oligarchs and the same mindset that are only interested in what is best for them and their previous employers like Citi and Goldman Sachs. I sincerely hope that Obama may see the light some day and start listening to those like Roubini, Taleb, Stiglitz and Roghoff. The time has come for the charade to end or face what Japan has gone through for the last ten years or worse, a depression with unimaginable consequences.
What is the/a stress test?
Ian, I am with the metaphor police, drop your pen and put your hands-up!
There hasn’t been a bull in these economic parts for years. Although I must admit, there is a considerable amount bull residue about.
Seriously, this is a good an thoughtful post.
See Jane’s and masaccio’s posts earlier today.
He won’t see the light in the near future because what the light shows is the massive fraud of the entire system and especially his chosen advisers, Rubin, Geithner, Summers, and go down the list of CEOs of all the Wall Street firms and major banks. Criminals all. Do you think he wants to face that fact?
Thanks, Ian. I keep having this thought that one of the factors in Geithner’s reluctance to admit that the banking system is in fact bankrupt is the fact that the major players have trumpeted the present system for decades. These people are still proponents of Friedman’s free market philosphy and are unwilling to admit it’s a failed economic philosophy and want to use bandaids to keep the major arteries from bleeding out.
failing institutions and businesses should be allowed to fail
Why are we using taxpayers $$ to reward failure
The last 8 years under Bush Are a good example of why we shouldn’t reward incompetence
As soon as Treasury says Citi passed the “stress test” and is ok to continue fleecing the public.
Certainly by then, maybe sooner.
That stress test is more rubbish that was created by mathematicians to diddle around with “risk management”
Banking should have N O T H I N G to do with risk. It should be as dependable as the sun rising in the east.
And that’s the banking system we need. Bye bye to the traders of paper and risk for profit. They can take up residence in las vagas.
Stress testing is letting the same wolves guard the chickens and announce that the hen house is in order.
This is why I believe in credit unions to put my money in. LOL
Ok here’s a really dumb question. Do you have to belong to an organization in order to participate in a credit union? Thanks.
no
It really varies by Credit Union. I still belong to one in upstate NY where the only requirement was that you had to live or work in the city it was located in.
Egreg – there are two different types of credit unions that I know of: company related or organizational related AND community based ones. For company or organizational, to get the first account, you need to be a member or employee of the organization or company. Then you can make direct relatives members through you. With community based ones, you just need to live there. IBM’s credit union, for example, because a community based one years ago. So, even though I never worked for IBM, I can join Visions here locally because they became community based.
Hey! Wait a minute. Dumb questions are MINE, all mine! *g*
So how does someone evaluate the good, bad, ugly? I am desperately trying to figure out how to salvage what’s left of my nest egg, which now resembles a tiny, messy omelet.
Risk is part of life; it can never be eliminated. As far as a blanket “screw them” for investors once again I have to disagree. There are many Many investors who have been victimized by a system that was allowed to run amuck. What many of the “investors” are is pension funds that people were invested in totally by the choice of others charged with managing the funds. Let us hope that something can be acheived in a way that is something better than a blanket screw them.
Ian,
Thanks for another report on this. I am hoping that your message, along with those of James K. Galbraith, Roubini, Taleb, Stiglitz and Roghoff.
Who are the Representatives and Senators to whom we should be writing about this?
Sen. Dodd, I assume, and who else?
Bob in HI
It also varies by state regulation.
Some states are ‘friendly’ to credit unions, others are not.
All should be.
But the ‘nature’ of the credit union matters as well.
Some are actually responsive to their ‘members’, and under their member’s control, others are not.
But most are, indeed, ‘local’ and, to some extent, part of the community in which they are founded.
Credit unions are like all other financial organizations, they have to provide financial statements and annual reports to members and possible members. You need to look at that information just the same way you would with any other organization you would be investing in, for example, looking at their asset base, the number of loans out vs. loans that they have had to write off for bad debt. The other thing is to look at the services being offered. All FCUs are not the same – ours is big enough that they offer investment vehicles, insurance, mortgages, car loans, etc. etc. Some are very small. Talking to people who are already members and asking them about customer service, responsiveness, etc. is a good thing. I know our credit unions locally are the only vehicle that small businesses can use to get business loans locally now – the commercial banks are not interested in making any loans under $100K – seeing how much local small business work/farm work they do is another measure of their community focus. But in general, you can get many of the same very conservative instruments – like CDs – that you would want elsewhere. I don’t know if you can buy T Bills through them, however.
OK..I’m off to go work out…
Barbara,
Don’t cash out your savings now, if you can avoid it. That would amount to “selling low,” which is the worst time to do so. I’ve lost on some of my accounts, but I’m going to leave them be, hoping for a recovery. We just have to ride out the next 3 years, and then most of these investments should recover. Of course, my investments are in mutual funds, not single stocks. If your savings are in single stocks, your assessment will have to depend on an assessment of the recovery potential of those companies.
Bob in HI
There are ethical investment counselors. If you need a reference I can provide one.
Is an annuity safe from all this mess?
it’s hard to invest with any kind of confidence ,who can you trust
I am sorry I have to disagree with you.
When anyone or institutions invests money they are doing so to earn money or at the very least hedge against inflation.
Once they admit to the idea that an investment is to make money they, or the institutional investor CANNOT and SHOULD NOT avoid the ethical consequences of their investments.
If you or X wants to make a high ROI then invest in the MIC. Do you think a pacifist could do this with out being a hypocrit? NOOOOOOOOOOOOOOOOOOOOO
Therefore when one has money to invest it is required that they invest ethically in instutions and business who behave ethically. If they don’t they are not the least bit entitled to be made whole if one of their investment goes south.
As for those who invest in money market funds the same applies. You can’t have it both ways. If you are in for the cash, you take the hit and the ones which usually go down are the unethical ones. Sad thing is that they are taking everything with them.
Not true.
Have you investigated ethical investing?
Ya know what? Some of us are too ignorant to survive all of this. I am a smart woman, but totally ignorant about a lot of things that matter. And given my care load right when all of this mess exploded (and given that David was one of my most trusted personal advisors), I completely dropped the ball. I have an financial advisor, but in some ways, I suppose, that’s the fox/henhouse thing. I believe him to be ethical and smart, but I don’t know any diplomatic way to say, “Should I get out of these investments?” I know, I know. Screw diplomacy. But you have to remember I’m a Minnesotan. Even when we go off on someone, we feel bad about it! *g*
How about a REAL investment? How about offering to invest in a startup company which needs funds to get out a new product? How about a real investment instead of garbage financial instruments?
Individually or as a venture capital group?
People who live their lives in a fog, who think not about the consequences of their actions, of where their money is invested and how it is being used are irresponsible. This is the fodder for capitalist / traders gambling and leveraging YOUR money for fun and profit.
When a teacher, or a municipal employee, or a state employee or a GM employee is on a pension plan how much control do they have?
however. There are many start ups looking for funding and groups which interview them etc.
Sadly not as much as they can. If they have the option to receive or control where their funds are invested so much the better.
I believe we don’t NEED private pensions, we need state pensions so there is no conflict of interest.
I would never buy a share, or participate in an unethical investment, pension or whatever.
We need to agitate for change because these money managers only know one thing – ROI and profit.
Of course there is no risk involved right?
If a company offers a pension, the employee must have the right to control where their money is invested. It is their money after all isn’t it?
Who said there is no risk?
There is risk in sending your child to school and assuming the teacher can educate her.
Having the same group that caused the problem – or did nothing to prevent it – in charge of fixing it, is not a bright idea.
(Checked my brokerage statements: the bank stock I can see that I own is a minor part of the account. The stuff buried inside funds may be a problem.)
I
Yeah we can put Jeb Bush in charge! /s
How much control do investors have over mutual and other funds?
A lot less than you think.
How many people have enough knowledge to invest wisely and well?
A lot fewer than you think.
That’s why there are brokerages and investment managers. It’s a matetr of trust – which may be misplaced (see: Madoff).
From 14
from 43
Trust but verify.
Why would anyone in their right mind fork over their life savings to an person and an operation they don’t understand?
Trust is ever important, but knowledge is power and anyone who is smart enough to earn extra money is smart enough to see it well invested. No excuses.
What about a stack of good old US savings bonds?
Mike you are missing my point about risk. There is risk and there is risk, there is trust and there is trust.
I trust that the pilot of the plane has a license. I don’t ask to see it.
There are things which require due diligence. Investing is one. When we make a purchase of a big ticklet item we do research – that’s due dilugence. Going through a shiny door at Smith Barney is not due diligence.
When a teacher hires on at a school district and is “enrolled” in the pension plan where is the availability to do research and have a difference in anything
Banks are more than clearing houses.
Every loan has a risk of not being aid back. Unless you want no loans being made banks have risk of default. Slicing and dicing loans into derivative instruments has risks too, and in the case of a lot of these the risk was not understood clearly.
Is that investing in the treasury dept. or a drone in Pakistan?
The district I work in has a pension plan in place and you are enrolled in that plan.
IIRC from the old M*A*S*H TV show, Frank Burns loved his Savings Bonds because he loved to invest in the war.
Yes it is investing in the US government and it does bad things. Couldn’t agree with you more on that.
Admittedly it’s hard to invest ethically, but it can be done and abdicating is not the best approach.
So then, would that make Obama Hoover?
And if Obama is Hoover, who will the next FDR be?
Joe the Plumber?…
Agreed
US Savings Bonds (Bombs)?
Well, our principle (snort!) ‘manufacturing’ capacity (given ‘off-shoring’ and the ‘new’ economy) does appear to be centered around war material …
Which suggests a certain ’symmetry’ in recognizing and ‘investing’ in same.
As to whether it is a wise, long-term investment ’strategy’ for the little people remains, obviously, ‘debatable’.
As to whether such ‘policy’, as the larger national ‘direction’, is proof against future ‘riskiness’ or massive ‘disappointment’ (what other ’serious’ consequence could befall God’s Chosen People?), only time (and the consciences (?) of ‘Those Who Must Be Obeyed’) will tell.
Personally, my ‘investments’ such as they are, are in people, the environment and the audacious hope that we shall muddle through sufficiently well to actually have a future for my children.
I know, that is selfish in the extreme.
So, may I claim to be an honest victim of Human Nature and leave it at that?
;~D
I agree that the G7 meeting shows that the rest of the industrialized world is as clueless as Obama and his economic team about how to address the spin toward depression. We are certainly not exercising any leadership and they aren’t either.
As for stress tests, they are a sham. We have known since August 9, 2007 when the housing bubble burst that the banks were insolvent. That was 18 months ago, and the answer of our elites to this is to remain in denial about it. What Geithner is talking about is making the Titanic seaworthy again after it broke in two and is sitting on the ocean floor. Good luck with that.
Here’s an interesting comment:
“Sex and corrupt politics in DC is nothing new. For example, during the Civil War there were 450 brothels in the capital. Part of the mythology of Washington, however, is what might be called the Jim Lehrer Illusion, which is to say that all people in DC do is sit around and rationally debate policy alternatives. In fact, Washington politics is also heavily driven by cowardice, bribery, blackmail, deceit, fear, loyalty to old buddies and even older bodies, cooptation, sex, and just plain crime. Journalists who pretend otherwise either don’t understand what is going on or are covering for someone.
The public often misunderstands the importance of Washington scandals, assuming them to be a simple dalliance, individual failing, or private offense. What makes both sex and crime in DC different, at least when those in power are involved, is that there is far more opportunity for blackmail and far more skill at covering things up.
The blackmail may be used by members of one branch of government against those of another, by lobbyists against members of Congress, by the police against whomever they wish, and by foreign powers. For example, one way to keep a congress member bought is for a lobbyist to provide him with high class prostitutes. And it is noteworthy that both the Israelis and Boris Yeltsin apparently knew about Bill Clinton’s affair with Monica Lewinsky before the American public did.”
I don’t mind fractional reserve banking, so long as it’s done right.
lol, there’s plenty of BS though
(sorry for the late responses, couldn’t be here for when this was live)
Since you’re here now, Ian, mind answering a q from a fellow C.a.n.u.c.k.?
I’m probably repeating fifty comments, but I, like you, just arrived. Forgive me. Question: Is Geithner trying to minimize the shareholder losses that would accrue if he announced, ahead of time, that he’s ready to “nationalize” banks? I’m enough of a rube that I can’t see all the possibilities at a time like this (useless chess player, too). So?
Thanks. OH, and could you please post the url to the last set of fearless predictions you made about where things will head if such and such isn’t done? I’m sure your othe fearful readers would appreciate it, too.
IMHO he’s more trying to avoid a run on the banks than he is trying to protect the shareholders. The shareholders are toast anyway.