Krugman: "Lemon Socialism" aka "the Geithner put"

[amborin]

"People tend to forget this, but we were on the edge of a major banking crisis in the early 90s. it wasn’t just the S&Ls; commercial banks were in trouble too, largely because of big losses on commercial real estate. And I remember a conversation I had back then with economists at the New York Fed, one of whom declared that the only reason Citibank (as it then was) had a positive market value was the “FDIC put.” That is, part of the Citi’s downside was in fact covered by taxpayers, who were guaranteeing deposits whatever happened, while all of the upside belonged to the stockholders.

As it turned out, a combination of low interest rates and then the great Clinton-era boom meant that this put option was never exercised. But that episode came back to me as I parse stories about the Obama administration’s apparent emerging plan for bank rescue.

If the reports are right, the plan is to buy up some of the troubled assets — but only those that have already been written way down. The Obama team doesn’t want to buy up the assets that haven’t been written down. For the rest, the Feds will offer a guarantee protecting the banks against large losses. As best I understand it, the reason not to buy up assets that haven’t been written down is that paying book value would be an obviously bad deal for taxpayers, while paying a low price would devastate banks’ reported capital, a process sometimes known as “recognizing reality.” So the really important part of the bailout will involve providing what we have to call the “Geithner put”: taxpayers will assume a large part of the downside risk. This might — might — work out OK, just as the FDIC put of the early 90s did. But let’s be clear what this is: it is lemon socialism, pure and simple: socialized losses, privatized profits."

[MannyGoldstein]

1. Right On, Dr. Krugman

Thanks, Larry Summers! You rock!

[Skink]

2. Without the correct stimulus in place however, there might not be a boom.

Or congess could follow the Clinton play book and raise taxes and regulate.