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. (more…)