Bailout On The Cheap

ONE THING is obvious. The Obama administation’s plan to bail out the banks and clean up the toxic assets is mean to be done on the cheap. Write Rebecca Christie and Robert Schmidt of Bloomberg:

The plan is aimed at financing as much as $1 trillion in purchases of illiquid real-estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds.

Then there’s a Public-Private Investment Program. That seems to be designed to get the private sector to buy up distressed bank assets, and it’s backed up by guarantees from the Federal Reserve and FDIC.

This puts the Obama administration half way between what we might call the Gordon Brown solution adopted in the Fall, when the government acted to shore up the banks by buying preferred shares in them, and the “Swedish” plan that featured temporary nationalization.

It all seems to depend, according to the Bloomberg article, on the willingness of private investors to step up and buy the distressed assets and the willingness of the banks to sell at realistic prices.

Liberal economist Paul Krugman wants the government to nationalize the banks and then clean them up, doing what the Swedish government did when their banks collapsed in the 1990s.

You can see the problem for the Obama team. Last Fall it took an almost complete financial collapse for Congress to pass the TARP bill. And with the AIG flareup the solons are afraid they might lose their precious seats if they voted more taxpayer money for nationalization.

So the Obama guys are hoping that a half-way plan will work.

But these are just details. One way or another, the government owns the problem, and one way or another it needs to bail out the banks enough for the financial system to have confidence in the banks again.

Then there’s the long-term question. Let’s set up a financial system that doesn’t need bailouts because it isn’t leveraged up enough ever to need bailing out.

But there’s a problem with that. The political elite likes to meddle in the credit system. It gives them a feeling of power and it gives them resources with which to buy votes. They’ll keep doing that until we the people stop them.

Can the Obama team save the banks on the cheap? Only time will tell. But for now, the markets like the plan.

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Christopher Chantrill blogs at www.roadtothemiddleclass.com. His Road to the Middle Class is forthcoming.

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