I don't think it's worth spending a lot of time discussing the Treasury's not-ready-for-prime-time nonplan plan to fix the banks.
Accounts have been nearly unanimous in concluding that what was promised to be "shock and awe" turned out to be nothing more than "aw shucks, we're confused." (Read Jon Markman's "Geithner's first test is a disaster" for one example.)
Reckoning with the rotten assets
One of these days, the mind-boggling mass of bad assets held by banks will have to be sold to the private sector at a price or, more likely, transferred to the government.However, the real sticking point continues to be discovering the prices at which these various assets can be sold. It looks as though the Treasury is unwilling (or unable) to acknowledge that elephant in the room, which is the first variable that must be solved for if we are to move forward.
Meantime, this issue was met head-on by Ray Dalio, the chief investment officer of Bridgewater Associates, who told a Barron's interviewer the following:
"What will happen to the pile of bad stuff? Let's say we are going to end up with the good-bank, bad-bank concept. The government is going to put a lot of money in -- say $100 billion -- and going to get all the garbage at a leverage of, let's say, 10-to-1. They will have a trillion dollars, but a trillion dollars' worth of garbage. They still aren't marking it down. Does this give you comfort?"
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The concept of a stress test for banks might be a start, if Treasury Secretary Tim Geithner and the Obama administration are serious. But at this juncture, they seem to have no idea how to deal with the lack-of-transparency/mark-to-market/insolvency issues that plague financial institutions.
The Obama financial strategists appear to have even less of a grasp of the issues than did the Bush team. I hope that's not true, and I hope they do better. Granted, they haven't had a whole lot of time on the job. But they certainly have had time to formulate their plans -- especially Geithner, who was at ground zero as the whole process unfolded. (Of course, he was at ground zero when the bubble was brewing, too, but that's another subject.)
The Fed bungled; the bust followed
Meanwhile, as we lurch from problem to problem with the economy and the financial markets, and the government's so-called solutions, one fact seems to get no attention at all: The Federal Reserve created the problems we now face.Stock prices became absurdly high during the bubble that popped in the first part of this decade. Then, as then-Fed chief Alan Greenspan attempted to bail out the equity bubble, he created the credit/real-estate bubble that basically imploded the financial system and the consumer economy.
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Geithner feels the heatJPMorgan Chase's CEO says the Treasury secretary should take his time fine-tuning his financial-recovery plan.
At some point, if we're going to put this country on a sound footing, we need to essentially abolish the Fed or rewrite its approach to monetary policy. I think it's important to continue to remind folks of the Fed's culpability, in the hopes that somehow that discussion will occur.
Continued: Unproductive worrying over 'crowded' gold trading
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