Home -> Law Blog Directory -> Legal Commentary Blogs -> Economics of Contempt

Legal Commentary

: Economics of Contempt

Since when is Treasury under a "wait and see" policy?

By Anonymous

I'll give Simon Johnson one thing: he's great at knocking down straw man arguments.

Today's straw man is Treasury's alleged "wait and see" policy on the banks. Johnson and Peter Boone claim on the NYT's Economix blog that Treasury's plan is to "look the other way on big banks' problems and hope an economic recovery brings them back to sustained profits." They then proceed to show why this "wait and see" policy is a bad idea.

Clever!

Too bad it's just not true. How any semi-informed commentator could describe Treasury's approach as "wait and see" is beyond me. Treasury has adopted a multifaceted approach to the major banks, which includes the Capital Assistance Program (CAP), as well as the Public-Private Investment Program (PPIP), which encompasses the Legacy Securities Program and the Legacy Loans Program.

What do Johnson and Boone propose? Something eerily similar to what Treasury has already proposed:

We know there is a problem in the banks, just not how large it is. So why not do more than is absolutely necessary, in terms of forcing restructuring and recapitalization of the sector (ideally with private money)? Give everyone certainty that the problems are over once and for all.

Gee, that sounds an awful lot like Treasury's Capital Assistance Program, which is designed to determine how large the problem in the major banks is, and then force each bank to recapitalize ? "ideally with private money," but if that's not possible, then with government money.

As for forced restructurings, Treasury currently lacks the legal authority to do that, but it has already proposed a new resolution authority for large bank holding companies. (I personally don't think the proposed resolution authority can work, but you can't say that Treasury isn't trying to acquire the legal authority to force restructurings of major bank holding companies.) Oh yeah, and then there's the $1 trillion PPIP, which I hear is kind of a big deal.

Whatever you may think of Treasury's approach to the banks, it's hardly "wait and see."

Full post as published by Economics of Contempt on April 23, 2009 (boomark / email).