More on TARP

Joe Nocera argues that the first formulation of the TARP was correct. The basic problem is to get the bad assets out of the banking system. Recapitalization made Gordon Brown a hero, and it prevented a deepening of the crisis, but lending will not start till the toxic assets are removed. I thought that this was the lesson we learned from Japan in the 90's.

The only quibble is that what we have to do is not the original TARP. The problem there was that they wanted to buy toxic assets. The correct solution is to take over the problem banks and corral the assets in a new RTC. Nocera actually argues this. But the important point seems to be that nobody was comfortable with an RTC-type solution in September. That is because there was not a wide enough recognition of the size of the losses.

Now that Nouriel Roubini has further revised upwards his estimate of total writedowns it may finally convince the powers that be that RTC is the way to go. Here is the money shot:

We have now revised our estimates and we now expect that total loan losses for loans originated by U.S. financial institutions will peak at up to $1.6 trillion out of $12.37 trillion loans . Our estimates assume that national house prices will fall another 20% before they bottom out some time in 2010 and that the unemployment rate will peak at 9%. If we include then around $2 trillion mark-to-market losses of securitized assets based on market prices as of December 2008 (out of $10.84 trillion in securities), total losses on the loans and securities originated by the U.S. financial system amount to a figure close to $3.6 trillion.

Will people start to believe Dr. Doom now?