It's All About The Capital, Baby
Noam Scheiber had a nice chat with some sources over at the Treasury Department about what happened to the loans portion of Timothy Geithner's Public-Private Investment Partnership (PPIP) program. The answer? The program was meant to raise capital. If the banks are raising capital on their own, then there's no need for it. As one insider told Noam, "If you had asked -- I don’t want to speak for the secretary -- what’s problem number one? I think [Geithner would] say capital. Problem two? Capital. Problem three? Capital. Everything was in the service of that view."
How comfortable you are with this explanation rests on how confident you are that the economy will continue to improve. If the green shoots grow into a lush field, then no one will ever miss the PPIP program that never happened. But if the economy reenters a period of distress -- and there's plenty of historical precedent for that to happen, and plenty of possible culprits (rising oil prices, turmoil in Iran, etc) -- and bank capital dries up, we might wish that these loans weren't around to cause chaos on bank balance sheets. It's like having a weak roof: You can delay worrying about it so long as you don't have much rain.
Earlier this month, I spoke with Raghuram Rajan, a banking expert at the Chicago School of Business, who argued, essentially, that the lesson of the last few years is we might want to be a bit more risk averse when it comes to the banking system, and that we're making a mistake by not doing so now:
"In the best of all worlds," Rajan says, "what you would do is take advantage of a period when the market is really calm to do what needs to be done: Get the assets off the nerve center of the economy -- the banks -- and over to the guys who can hold them in the long term." If that's not done now and doesn't need to be done later, that's fine. But if it does need to be done later -- if we reenter the downturn, and the banks begin to look shakier -- we'll wish we had moved the assets when the market was calm and stable, rather than leaving them to create uncertainty and volatility at the center of the banking system.
"At this point," concludes Rajan, "banks don't have any incentive to sell these loans. But the message of this crisis is that when we didn't use periods of calm to make things better, we found they could get worse."
Photo credit: Marvin Joseph -- The Washington Post Photo.
Posted by: seldomused | July 1, 2009 1:12 AM | Report abuse
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