Admit reality, restructure banks and,

[y66]

According to today’s Washington Post, Timothy Geithner did a better job of selling the Obama administration’s financial rescue plan to his G-7 colleagues in Rome Saturday than he did last week of selling it to Wall Street.

 

Several officials said Geithner was particularly helpful in explaining how the various elements of the administration's initiatives tie together as well as how he plans to combine public funds with private resources to get more bang out of every rescue dollar the governments spends.

 

"What Tim Geithner wanted to do is set out the framework in which he's operating," Britain's Chancellor Alistair Darling said in an interview. "But he's made it very clear that he sees the urgency of this." Darling told a group of reporters: "It's quite clear that the new American administration is getting into its stride, it wants to make a real difference not just for Americans but for the wider world."

So the plan is now less vague. I guess that’s something. But after reading Martin Wolf's take on the plan and Gretchen Morgenson's, I’m still amazed that Geithner and others have not been more forthcoming about the problem of impending insolvency for huge parts of the financial system.

 

I agree with Wolf that "hoping for the best" is a huge gamble and I am struck by his observation that U.S. policy makers are reluctant to prescribe for themselves what they would not hesitate to prescribe for others:

 

The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once.

[Winstonm]

QUOTE 

The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once

 

But we are Americans, leaders of the free world and Exceptional - we get to lecture others on how to act but do not have to follow our own advice. We have a right to profligacy - after all, "We're on a mission from God".

[kenberg]

In terms of admitting reality:

 

A goodly portion of our wealth, nationally and for many people personally, was fictional. To the extent that this is true, no amount of hocus-pocus can restore our fictional wealth since it was never really there to begin with. If people spent money and if banks lent money on a fictional basis, there is no way it can all work out OK for them.

 

I don't think that this means we have to be hard hearted toward people or take a hands-off approach to bank rescue. But there does have to be a realization that the consequences of bad decisions cannot always be avoided.

[Winstonm]

In terms of admitting reality:

 

A goodly portion of our wealth, nationally and for many people personally, was fictional. To the extent that this is true, no amount of hocus-pocus can restore our fictional wealth since it was never really there to begin with. If people spent money and if banks lent money on a fictional basis, there is no way it can all work out OK for them.

 

I don't think that this means we have to be hard hearted toward people or take a hands-off approach to bank rescue. But there does have to be a realization that the consequences of bad decisions cannot always be avoided.

Ken,

 

When you say fictional wealth, you are describing that which Minsky described - that period of time when only Ponzi fincancing exists, which cannot service either the debt nor the interest but relies only on ever-increasing price to sustain itself.

 

It is not real wealth creation, but illusion. Attempting to prop up the illusion is impossible.

[PassedOut]

A goodly portion of our wealth, nationally and for many people personally, was fictional. To the extent that this is true, no amount of hocus-pocus can restore our fictional wealth since it was never really there to begin with.

An interesting piece by Krugman today: Ken Berg is Right

 

Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

 

At one level this should come as no surprise. For most of the last decade America was a nation of borrowers and spenders, not savers. The personal savings rate dropped from 9 percent in the 1980s to 5 percent in the 1990s, to just 0.6 percent from 2005 to 2007, and household debt grew much faster than personal income. Why should we have expected our net worth to go up?

 

Yet until very recently Americans believed they were getting richer, because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing.

Time to start saving paper and string.