Thumbs Down?

Pundits Weigh in on Geithner Plan

Thanks to the FDIC’s loan guarantee, there is a big upside if the assets do well. That upside is there to lure the rich guys in. That is why the big funds were happy; that is why the stock market went up. For the high rollers, this casino could be very attractive.

. . . If the subprime securities are truly trash, most of the big banks are troubled and some are insolvent. The FDIC should put them through receivership, get clean audits, install new management, and begin the necessary shrinkage of the banking system with the big guys, not the small ones. It should not encumber the banking system we need with failed institutions. And it should not be giving CPR to a market for toxic mortgages that never should have been issued, and certainly never securitized, in the first place.

--James K. Galbraith, "The Geithner Plan Won't Work"; The Daily Beast (3/25/09)

The ink is barely dry on the latest bank bailout plan, but judging from the online commentary, the verdict is already in: thumbs down (unfortunately).

At best, the bailout -- with non-recourse loans from the FDIC as the linchpin -- is viewed as a proactive, interim step that may improve psychology. In turn, improved psychology will hopefully spur increased economic activity.

At worst -- and Galbraith's comments are representative -- Geithner's plan is seen as dangling even bigger carrots in front of dubious actors to get them to clean up a mess they made. In other words, more "heads they win, tails we (taxpayers) lose" consequences.