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I've been a sort of half-hearted defender of the Public-Private Investment Program, proposed by Treasury Secretary Tim Geithner on Monday. While other, more aggressive policy options seem to have a greater chance of success and carry less water for Wall Street, they are also much more expensive and politically complicated, and certainly not feasible in the near term. Now, Nouriel Roubini, one economist who was ahead of the crowd in predicting and understanding the financial crisis, sees positive notes in this plan, particularly because it will reveal more information about the banks' balance sheets in a public and official way, allowing for more direct government intervention down the line with the banks that truly need it.
“I see the option of nationalization” and the one presented by the Obama administration “as being complementary,” Mr. Roubini said. He believes that the stress tests the government plans on conducting on the banks will reveal which are solvent and which are insolvent.In his view, those banks that are deemed insolvent will not participate in the toxic-asset plan and will be taken over by the government. Banks deemed solvent will be the ones that get to participate.Nationalization “is fully on the table for banks that are insolvent,” Mr. Roubini said....“The most important thing is what Bernanke and Geithner said today about the need for an insolvency regime for systemically important institutions,” Mr. Roubini said. “You are going to need that not just for the A.I.G.’s of the world, but also the bank holding companies as they go into Chapter 11.”He added, “You are going to need that in shutting down, potentially, a bank like Citigroup.”Thinking of the PPIP as a part of a larger, moving structure helps to clarify it's value. While I've heard a lot of convincing arguments that this is too much subsidy to bankers and that it's possible to game the system, I haven't been convinced that the plan won't work in its intended function of moving troubled assets off bank balance sheets -- or simply reveal in a public manner the nature of those balance sheets as a first step towards broader action. It's well worth reading Noam Scheiber's piece on the political situation that Geithner finds himself in as he tries to lay the ground for the temporary nationalization option. He's caught in a very sticky situation, and the PPIP could give him the time and the flexibility to move forward.
-- Tim Fernholz
