Wednesday, February 11, 2009

Is the Treasury's plan destined to fail?

Here's an interesting take on the Geithner plan for shoring up the banks' financial situation. The article makes a compelling argument as to why the plan is not really a great deal for would-be investors and definitely a loosing proposition for taxpayers. So is the Treasury's plan destined to fail? Are the core causes of this mess addressed?

With my training in business management and finance I can see the validity of the issue raised here. In fact, I'd be in greater agreement with Nouriel Roubini's recent position that the banking system should be nationalized; with the understanding of course that only the payments and credit system for businesses and individuals would come under the government's fold.
All this makes me realize how wise the Belgian legislation is when it mandates that each company's and citizen's debt be centralized and monitored so as to remain within reasonable limits with respect to that entity's revenues. At the end of the day we should not forget that this whole mess comes because of:

  1. excessive debt given to US consumers

  2. extreme reliance of value creation in the economy on private over-consumption

  3. speculation and valuation levels completely disconnected from economic reality

  4. finance being the master when it should be the servant of the economy

  5. a world financial system in which the poorer nations lend to the richer ones whose consumption exceeds value created

  6. a serious problem in the way we measure value creation and performance right from individual level and up to macroeconomic reality

  7. key economic mechanisms based on fear and greed leading to inappropriate levels of transparency, inadequate involvement of key stakeholder and dysfunctional corporate governance

These issues will not be addressed by the Treasury’s plan, but I hope we get down to tackling them rather sooner than later because doing more of the same will produce more of the kind of mess we’re seeing these days.

clipped from

The Treasury Secretary announced his strategy for a better banking bailout. But subsidizing the purchase of bank assets and forcing mortgage writedowns is the wrong way to go.

The real problem in the housing market is the rampant job loss. Most Americans whose homes are worth less than their mortgages keep paying. The Boston Fed found that during the crushing downturn in Boston in the early 1990s, only 6% of the underwater homeowners defaulted.

Hence, the right plan should focus on crafting a break for people who've just lost their jobs, not the 85%-plus of Americans who keep paying even with negative equity.

The best formula for stemming foreclosures is a highly targeted plan to aid people who have lost their jobs. For this group, the moral hazard issue is less pronounced, since it's unlikely that Americans would risk unemployment to get a break on their mortgages.

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