Ezra asks, "Has The Obama Administration's Banking Plan Failed?" I answer, no, not yet.
He is specifically concerned about the half-death of the Public-Private Investment Program. It was designed to take toxic assets off of bank balance sheets, but now the loan-side of the program is being shuttered before it began due to a lack of participation. Like other critics of PPIP, Ezra is putting too much weight on the program when it is only one component of the administration's plan -- and the securities-side PPIP is still apparently moving forward.
There are also the various Fed lending programs and the Treasury's capital infusions into the banks through the original TARP program. Though Ezra does note that the current reality is worse than what the bank stress tests feared, he also fudges the numbers a little -- the stress tests expected an average unemployment rate for the year of 8.9 percent, not that the unemployment rate would stay at 8.9 percent all year. See this graph at Calculated Risk to see more closely what's going on -- none of that is particularly positive data, but it's different from saying that the projections have been completely blown out of the water.
The real measure of the administration's success is simple: Is the financial system starting to move back toward regular lending behavior? That remains unclear, as James Hamilton has documented. Lending has not been growing much, despite the fact that risk-of-lending as tracked by the TED spread remains relatively low. Hamilton flags in particular this report [PDF] from Nomura investing, which notes the anemic growth in lending but also observes that "lower credit growth does not necessarily imply that policy efforts have failed: high household leverage and a deep recession are both good reasons for credit demand to decline."
From looking at these factors, the administration's bank policy cannot be called an unqualified success or failure; especially on the occasion of one part of the government's response being abandoned. But recalling the harsh alternative scenarios presented by other policy options, it's hard to look at the current state of affairs and call it a failure. True, not all of Ezra's important questions have gone away, but some were answered through the stress tests, which, bad baseline or no, confirmed the IMF's assessment of how much capital the major banks needed. As to the value of the toxic assets, it's pretty clear that banks aren't interested in selling them at the prices they can command, so barring some new government effort, their value ultimately depends on overall economic recovery and more specifically on the efforts that the administration is undertaking to right the housing markets.
The better question to ask is, what should the administration do next? Events seem to have outstripped the arguments on either side of the solvency-insolvency question as banks have shown the ability to raise private capital and earn their way toward stability alongside of the government's insistence that they continue to hold on to TARP funding. Even the calls for seizing and restructuring insolvent banks seem to have died down in recent months. As the Treasury seems focused on the vital efforts of financial regulation reform -- which will represent a major policy test and hopefully a major restructuring of the financial sector -- what are the good policy proposals to encourage more lending in our current climate?
-- Tim Fernholz