Friday, February 13, 2009

Bank Bailout

Two articles in today's NYTimes on the bank bailout. The first points out that the costs may be much larger than people think.
A sober assessment of the growing mountain of losses from bad bets, measured in today’s marketplace, would overwhelm the value of the banks’ assets, they say. The banks, in their view, are insolvent.
The second article looks at the parallels with Japan's lost decade:
The Japanese have been here before. They endured a “lost decade” of economic stagnation in the 1990s as their banks labored under crippling debt, and successive governments wasted trillions of yen on half-measures.
“I thought America had studied Japan’s failures,” said Hirofumi Gomi, a top official at Japan’s Financial Services Agency during the crisis. “Why is it making the same mistakes?”
Two points come to mind immediately. First, on the size of the losses. These come from marking to market "toxic' assets. But as I noted in previous posts these are due to information and coordination problems. The market values are low because they value an arbitrary collection of mortgages not the whole complex of them. So the amount needed to capitalize the banking system is larger with a plan that is not comprehensive. On the magnitude of the costs and the argument for nationalizing the banks, see this article by Roubini and Richardson in the Washington Post.

Second, delay just magnifies the costs, but here politics is vital. Half measures to avoid the painful costs only multiply them later. But given how difficult the stimulus plan was to pass, is it credible that Treasury will now undertake a comprehensive plan? Of course, my plan is comprehensive, and ultimately not that costly, but where is the groundswell of support?

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