I subscribed to the daily Bloomberg economics podcast last week and it's been rather revealing. I once looked over at Roubini, or what I thought was Roubini last spring and instead I got this rant from a guy whose name I forgot. At any rate, I highly recommend the Bloomberg podcast.
Bank Triage
The government has to decide which banks are going to succeed and which are to fail. Simple. Depositors and investors have had no way of knowing which banks were close to insolvency or which the FDIC was in the process of negotiating mergers. If you would have asked me two weeks ago if Wachovia, of all the major strong banks in America was in trouble, I would have been shocked.
Deposit Guarantees
Roubini favors a blanket guarantee on cash deposits. It ultimately makes sense and as a temporary measure, I don't see the risk. Cash should be cash, and people should not make a run on banks thinking that their cash might disappear. I don't know how you work the details of getting the FDIC capitalized to insure all that, but I agree that this is an important step. It was a goody thrown in to bump up the limit. So that's better than nothing.
Preferred Share Purchase
I'm starting to understand this part and I think I like it. Instead of the government buying the only the dirtiest and most dubious assets of a bank, let them buy the best assets. It creates a 'flight path to quality' for the common shareholders, and then allows those shareholders, over time to convert their common shares into the preferred shares. It creates a new class of trust in those institutions, not just bailing out their stupidity. It's a tricky proposition, but I think I get it.
Asset Repricing
This is clearly the most controversial part. I don't like the idea of the government seemingly arbitrarily deciding how much mortgages are ultimately going to be worth outside of any market mechanism. It's possible that I don't understand the thrust of this, but it sounds similar to what Biden was saying about having bankruptcy judges arbitrarily whacking principle off mortgages and house prices. Roubini is no fool and I'm sure he is aware of the moral hazard of such an idea of creating a new kind of bankruptcy. So I'm going to keep my ears open on this piece.
Roubini says, and I agree, that the Paulson plan was thrown together very quickly without the cooperation of an independent panel of economists, either academic or professional. My reaction was to the Democrat reaction and Pelosi's dodgeball.
What's not clear to me is that the Congressional action was a be-all end all and last effort. It better not be.
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