Second Time’s A Charm

As far as the market is concerned, anyway, Tim Geithner’s second shot at laying out a plan to rescue the nation’s banking system is being received a lot better than his first. At this moment, the Dow is up over four percent.

You can read the Treasury Department’s description of the plan here. In essence, the federal government will partner with private industry (by taking most of the risk) so that “legacy assets”–bad real estate loans and mortgage-backed securities–can be taken off banks’ books. Of necessity, the program will start relatively small, but the Treasury Department contemplates that it may expand to as much as a trillion dollars. That would require more TARP appropriations, however.

I haven’t had time to digest the plan in detail and probably am not qualified to judge it in any event. As noted, investors (especially investors in banks) evidently like it. For a contrary view, check out Henry Blodget, who argues that the plan is based on “five big misconceptions”: 1) The trouble with the economy is that the banks aren’t lending; 2) The banks aren’t lending because their balance sheets are loaded with “bad assets” that the market has temporarily mispriced; 3) Bad assets are “bad” because the market doesn’t understand how much they are really worth; 4) Once we get the “bad assets” off bank balance sheets, the banks will start lending again; and 5) Once the banks start lending, the economy will recover.

Blodget’s view is that the economy’s weakness is due to an explosion of debt:

The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it. As consumers retrench, companies that sell to them are retrenching, thus exacerbating the problem. The banks, meanwhile, are lending. They just aren’t lending as much as they used to. Also the shadow banking system (securitization markets), which actually provided more funding to the economy than the banks, has collapsed. …

American consumers still have debt coming out of their ears, and they’ll be working it off for years. House prices are still falling. Retirement savings have been crushed. Americans need to increase their savings rate from today’s 5% (a vast improvement from the 0% rate of two years ago) to the 10% long-term average. Consumers don’t have room to take on more debt, even if the banks are willing to give it to them.

Of course, saving hasn’t worked out so well for most of us lately, either.

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