Comment on the Obama Administration's Financial Stabilization Proposal
February 11, 2009, revised February 27, 2009I disagree with the "stress test" for banks proposed by Treasury Secretary Geithner as part of the new administration's financial stabilization proposal. The proper time for intensive bank examinations would have been in the years before the banking crisis, as banks were accumulating bad assets. In the aftermath of the crisis, however, a "stress test" would only serve to undermine confidence in the major banks. I believe the proper course of action would be to allow the banks to revalue their bad assets in their own time.
Update:
February 23, 2009The spectre of bank nationalization has been haunting the markets recently. President Obama has said little about this issue, leaving the impression that the technocrats will make the decision. To reduce market anxiety, the President needs to make clear that forcible bank nationalization is out of the question. The federal government should be willing, however, to make additional equity investments in banks on an as-needed basis, in the event any bank requests such assistance.
Update:
February 25, 2009Today the Obama administration succeeded in calming market fears of bank nationalization. Fed Chairman Bernanke told Congress that the Administration has no plans for bank nationalization (defined as involuntary receivership and writeoffs of common stock). Likewise, Treasury Secretary Timothy Geithner stated in an interview with PBS Newshour's Jim Lehrer that bank nationalization is the "wrong strategy" while emphasizing the federal government's desire to provide more capital to banks that need it.
To his credit, Secretary Geithner lately has been emphasizing capital infusions for troubled banks rather than his questionable earlier proposal for a fund to purchase toxic assets from banks (i.e., the "bad bank" proposal).