What to make of the Treasury Department's latest bid to save the banks? We asked Kenneth Rogoff, a Harvard professor and former chief economist of the International Monetary Fund, for his thoughts.
I'm still digesting the plan, and I think it looks pretty much like what they discussed a couple weeks ago. It's a piece of the larger set of initiatives, all of which aren't enough to get credit flowing again.
The whole administration strategy seems to involve shoveling money to the financial system in the most opaque way possible. It's sort of an end-around Congress--both through plans such as this and also the Fed initiatives. The Fed initiatives involve all sorts of loan guarantees and various kinds of subsidies, and the Fed does not mark-to-market the way they're telling everyone else to. So, it's hard to know.
The administration also has the vision that somehow the big problem is that there's a mispricing of what are fundamentally fine assets, and that if the government just takes them off the hands of the private sector, it's win-win: The private sector gets cash, and the government will make a lot more than it paid. But I think we're way past that. And it's also a problem that the recession has gotten so deep that there are a lot of kinds of assets on the banks' balance sheets that are going to cause trouble.
A fundamental problem with the whole administration approach at the moment is that they seem to have way too rosy an economic scenario, and therefore think the whole banking system may not be that bad. The administration budget is based on having growth of four percent a year for four years, starting in 2010. It's just pie in the sky. It's possible, but I don't think it's any more likely than having unemployment hit 15 percent, which could also happen. They're both possible. They should be using a much darker scenario for planning purposes. And then the stress tests that they're putting on the banking system seem, again, very timid.
In my mind, there's no doubt that before this is over, some of the major financial institutions will have been put through an accelerated bankruptcy. I don't think there's any other endgame.
--As told to Katie Koch
Image courtesy of IMF.org