Tuesday, March 24, 2009

"Fixing" the Banks

Treasury Secretary Timothy Geithner has released his plan to fix the banks. You can read about it here.

Clearly the Obama administration doesn't "get it" and has completely misdiagnosed the problem. This reminds me of the practice of "bleeding" a sick patient with the expectation that the bad blood would come out and the patient would heal. Of course this practice did more harm than good, often leading to the untimely death of the patient.

For all those who said that Obama better understood the crisis facing us during the presidential campaign, here is the counterevidence to that claim:

From Mish's Global Economic Blog:

"... Geithner is suffering from five fundamental misconceptions about what is wrong with the economy."
  • The trouble with the economy is that the banks aren't lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it.
  • The banks aren't lending because their balance sheets are loaded with "bad assets" that the market has temporarily mispriced. The reality: The banks aren't lending (much) because they have decided to stop making loans to people and companies who can't pay them back.
  • Bad assets are "bad" because the market doesn't understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are.
  • Once we get the "bad assets" off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they'll sit there and say they are lending while waiting for the economy to bottom.
  • Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they'll be working it off for years.

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