There seems to be a great deal of confusion over the new plan for the old plan, when it comes to exactly what Secretary Geithner is going to be doing to try and relieve the credit crisis.
Geithner is a smart man undoubtedly and has the confidence of the president, another smart man. As such, I feel sorry for him; I am also a smart man and have first hand experience with how much fun it is to try and explain complex, arcane processes to the uninitiated. Add to that the combination of a desperate leadership vacuum and his general lack of charisma and you begin understand why the Secretary's announcement today fell flat. It's a sad thing that so often the persons most qualified to talk about something are the least capable of doing so. Let's see if I can help the man out a bit.
What The Enchanter is proposing seems to be a financial pincer attack, with an eye towards maintaining laissez-faire economic liberalism. That is, he's wont to help get the markets freed up then let the market run free. Think of it as wild animal rescue; after the critter is stable and healthy, you release it back into the wild.
So if this is a pincer movement, what are the particular gambits? Well first there is the move to get bad assets off the books as fast as possible. The obvious thing to do would be to have the Federal Government suck them all up. Unfortunately, this would require way more money than Timmy has access to, would send the message that tax payers will save banks from piss poor decisions and create a situation where a massive chunk of the economy is directly controlled by the Federal Government. Barely palatable in the extreme short term, none of these are acceptable long term policies. On the other hand, no private investor is going to touch any of these "assets" with a ten foot pole without some serious encouragement. So that's exactly what we do, pairing up public and private funds. We create a bridge to private funding, eventually shifting the full burden to the private sector.
The second line of assault on Ft. Credit is something so simple and well advised that I am absolutely floored that it didn't exist yet. A joint project by the various Federal agencies responsible for this sort of thing actually doing regular stress testing on banks' structures. See what they can actually do and find out where the weak spots are. The old saw about "an ounce of prevention" stands true. More than immediate need though, this principle stands out as a long term policy that will go great lengths toward prevent future financial fubars caused by what amounts to "funny money".
Finally, Brother Tim is putting together the framework necessary to start reworking mortgages already on the ground. He largely failed to explain how this is going to work because; A, this is still a work in progress and B, he's a lousy orator. Fortunately, the subject of this particular maneuver was brought up at the president's Town hall in Florida today and Obama managed to articulate what they do have much more clearly than Geithner. I'm trying not to be too down on the man; he is after all a fellow nerd. I can't help thinking though, "Its a bloody good thing his boss is so popular."
So, drawing all this together, what is going to happen? Well a lot of banks are going to make less money on real estate than they thought they would. At least a few more will undoubtedly disappear. All of them are going to come under much more scrutiny and will likely become more conservative in their investment practices. It's going to be a financially lean couple of seasons. The banks that emerge however will be cleaner, wiser and stronger. Individual home owners are going to lose some equity on their homes. Most of that will probably be the sublimating of inflated values; the venting of "false equity", like so much methane. With similar social connotations, I might add. The general public will be the last ones to see over all benefit. I anticipate it will be at least two full fiscal quarters before the banks resume spreading assets on a scale that will produce large scale job creation. I doubt very much if they'll go back to facilitating the same sort of wide spread consumer debt of recent years.
