There now seems sense of relief and renewed optimism that Geithner has finally presented a plan to clean up the US financial system from the subprime mortgages. The plan itself is really a reworked version of the old Paulsen Plan.
For political reasons, this matter has been in stalemate for months. US authorities do not want to put any large banks into receivership and reorganization nor do they want to be mixed up with nationalization. Many academics feel that these alternatives are cheaper and more efficient ways to clean up the banking system. The US has very well developed legislation and bureaucracy to do this; but after the LEH debacle last fall, they are very frightened of the fall out in the markets. They are worried about derivative transactions gettling locked up for years in legal proceeding. They seem particularly concerned about backlash from foreign sovereign creditors who would take big losses on their secured debt. Therefore, they prefer this convoluted solution that is in effect another large government subsidy to shore up the lame-duck banks.
There is an increasing trend to avoid US Congress authorization as the public opinion hardens towards the concept of more government bail-outs and subsidies to large corporations. Geithner intends to finance his plan by TARP money, the FDIC balance sheet and private sources. The Bernanke move last week to push down long term interest rates by purchasing US Treasuries and Agency debt obligations expands the FED balance sheet.
There continues to be the issue of huge public deficits and rising public debt in the US on all fronts. Even liberal economists like Paul Krugman feel that the Geithner Plan is going to be a very high price solution. The US enjoys the advantage of extremely cheap financing in the way of US treasuries and printing money via the FED that other countries do not have. In the end, they hope to cover this with growth of tax revenue in a booming economy. On the other hand, the US dollar has started to weaken a bit and commodity prices harden. It is early to call this a trend reversal but in time, this could create problems for a recovery.
Bottom line: there is finally a plan in place to clean up and de-block the financial system. Whether it is a good plan or not is a superfluous issue at this point. The markets feel relieved.
There are currently a lot of cross currents in the financial industry. Some institutions are getting nervous about government involvement in their internal affairs. Politics on the Beltway is ever more chaotic. It remains to be seen how effective this plan will be on implementation.
For political reasons, this matter has been in stalemate for months. US authorities do not want to put any large banks into receivership and reorganization nor do they want to be mixed up with nationalization. Many academics feel that these alternatives are cheaper and more efficient ways to clean up the banking system. The US has very well developed legislation and bureaucracy to do this; but after the LEH debacle last fall, they are very frightened of the fall out in the markets. They are worried about derivative transactions gettling locked up for years in legal proceeding. They seem particularly concerned about backlash from foreign sovereign creditors who would take big losses on their secured debt. Therefore, they prefer this convoluted solution that is in effect another large government subsidy to shore up the lame-duck banks.
There is an increasing trend to avoid US Congress authorization as the public opinion hardens towards the concept of more government bail-outs and subsidies to large corporations. Geithner intends to finance his plan by TARP money, the FDIC balance sheet and private sources. The Bernanke move last week to push down long term interest rates by purchasing US Treasuries and Agency debt obligations expands the FED balance sheet.
There continues to be the issue of huge public deficits and rising public debt in the US on all fronts. Even liberal economists like Paul Krugman feel that the Geithner Plan is going to be a very high price solution. The US enjoys the advantage of extremely cheap financing in the way of US treasuries and printing money via the FED that other countries do not have. In the end, they hope to cover this with growth of tax revenue in a booming economy. On the other hand, the US dollar has started to weaken a bit and commodity prices harden. It is early to call this a trend reversal but in time, this could create problems for a recovery.
Bottom line: there is finally a plan in place to clean up and de-block the financial system. Whether it is a good plan or not is a superfluous issue at this point. The markets feel relieved.
There are currently a lot of cross currents in the financial industry. Some institutions are getting nervous about government involvement in their internal affairs. Politics on the Beltway is ever more chaotic. It remains to be seen how effective this plan will be on implementation.
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