Business Times - 13 Feb 2009
Here we go TARPing again to nowhere
For markets, it may be safe to assume that Washington hasn't found a way to fix the mess
By LEON HADAR
I WOULD not be surprised if a new term, 'Geithnerism', is soon going to be used by lawmakers and investors. Named after US Treasury Secretary Tim Geithner, it could become shorthand for the response from an underwhelmed Capitol Hill and a jaded Wall Street to another of the many efforts by Washington to restore calm and generate confidence in the financial market: a sort of 'Here we go TARPing again to nowhere'.
This sentiment would exactly characterise the reactions to the Obama administration's 'much anticipated' and 'long awaited' revamped Financial Stability Plan to tackle the still-unfolding financial crisis announced by Mr Geithner in the ornate Cash Room of the Treasury Department earlier this week.
'This is a dangerous dynamic, and we need to arrest it. It's essential that every American understand that the battle for economic recovery must be fought on two fronts,' Mr Geithner announced, reading slowly from the teleprompter in front of him. 'We have to jump-start job creation and private investment, and we must get credit flowing again to businesses and to families.'
One element in the plan will be a joint Treasury-Federal Reserve programme to establish a fund of at least US$500 billion to encourage investors to buy bad mortgage-related assets from banks and help recapitalise financial institutions. The other part would be expanding an existing Fed programme to support lending by consumers and businesses to about US$1 trillion.
Mr Geithner warned lawmakers, investors and consumers that the steps he announced were just the first in a long and painful effort to revive the ailing financial system.
'This strategy will cost money, it will involve risk, and it will take time,' he said. 'But as costly as this effort may be, we know that the cost of a complete collapse of our financial system would be incalculable for families and for businesses and for our nation.'
Mr Geithner also proposed that US banks would be required to undergo a rigorous 'stress test' to determine if they can survive the economic downturn and be eligible for support from Washington. 'The battle for economic recovery must be fought on two fronts,' he said. 'We have to both jump-start job creation and private investment, and we must get credit flowing again to businesses and families.' The financial markets, less than impressed by the Troubled Asset Relief Program or TARP last year, were clearly not impressed this time round either. At the same time, lawmakers on Capitol Hill greeted the plan with scepticism, arguing that it was short on details. They pressed the Treasury secretary for more specific information.
'It appears here that your plan is offering at this point only a conceptual plan, with many details yet to be filled in,' said Republican Senator Richard Shelby, during a hearing. 'It's hard to test the merits of a plan that is not spelled out, as you well know.' Mr Geithner responded that what his plan amounted to was a 'broad architecture of the programmes we think are necessary to help solve this thing', and that the Obama administration would be very careful in fleshing out 'the details and design of these things in ways that protect the taxpayer and get the maximum potential benefit for the resources we're going to spend'.
He continued to be pressed again for details during another Senate hearing on Wednesday. 'The market has made clear that certainty and stability are commodities of great demand; unfortunately, that is not what we received yesterday,' said Republican Senator Jeff Sessions. 'Secretary Geithner, you need to give a detailed plan in clear terms of how we are to proceed,' he demanded. 'You've had more than a month to work on the proposal, but what we've heard is an outline.'
But Mr Geithner did not give any more details. Instead, he simply said: 'The president, the Treasury and the entire administration are committed to working with you to see it through because we know how directly the future of our economy depends on it.'
Also appearing on Capitol Hill this week was Fed chairman Ben Bernanke, who argued that Washington's efforts to revive the financial system were having an effect. The proposed new plan was going to work, he added, noting that 'one very important fact about the American financial system is that only about half the loans in normal times come through banks', and that 'the other half goes through other kinds of markets like securitisation markets'.
The Financial Stability Plan, he said, 'will help get credit flowing outside the banks. So that's an important part, because that's about half of our credit system.'
But as one prominent economist, Nobel laureate Paul Krugman of Princeton University, pointed out, the proposed plan's major weakness was its failure to provide details about what the government was planning to do if, after conducting the 'stress test', auditors discovered that 'a number of major banks are basically not solvent'.
But, as Mr Krugman told Public Television's news show, the lack of detail may paradoxically prove to be the strength of the plan. 'The favourable interpretation from my point of view is that this whole thing with the stress testing may end up being sort of a Trojan horse to smuggle the good guys into the fortress. The public isn't ready, Congress isn't ready for major nationalisation. But this is a way to set things up so that - if that proves to be necessary when you can take a good, hard look at the books - we sort of got the mechanism in place,' he explained.
'That's what we're hoping the plan means but, you know, it was really pretty unclear what exactly is going on.'
Perhaps it would be better to assume that Washington has yet to figure out what to do about the mess on Wall Street. Stay tuned.
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