The general reaction to U.S. President Barack Obama's bank-rescue plan, outlined by Treasury Secretary Timothy Geithner on February 10, has been skeptical. Its critics include Jane D'Arista, an economic analyst with the Financial Market Center think tank in New York and former congressional staff economist.
In an interview with RFE/RL correspondent Andrew F. Tully, D'Arista says Obama's economic team seems to be misidentifying what needs to be fixed, that the plan leaves too much to chance, and that Geithner isn't a good spokesman on Obama's economic policy -- at least not yet.
RFE/RL: What is your overall assessment of the financial rescue plan that Secretary Geithner outlined on February 10?
Jane D'Arista: I think it's disappointing; I think it lacks clarity, I don't know that it will work. It's troublesome for a number of reasons. It's supposing to put more capital into banks without the assurance that that capital won't also be at risk -- without the assurance, that is, that they're going to be able to handle the toxic assets.
That part of the program is very vague. My concern about it is that, while I concede that they want to have the market price, these assets, the market price -- as many have noted -- is likely to be too low, and the banks know that if they sell, there are going to be charges against capital.
RFE/RL: What about the plan to induce private investors to share in buying up the banks' toxic assets?
D'Arista: The concern is whether the private sector really has the ability to participate in this variation of the "bad-bank" proposal [under which bad loans would be segregated from good assets in funds known as "bad banks"], even with government guarantees. Because many of them, in order to do so, are going to have to borrow the money to do it. They are facing their own capital problems, and where they would get this money is problematic, because typically they have borrowed from the banks, and the banks are not going to lend to them.
RFE/RL: Maybe there's a reason, at this early stage, for a lack of clarity in the Geithner plan. He said the federal government will conduct what he called "stress tests" on banks needing help to determine the exact extent of their holdings of toxic assets. Isn't it best to draw up the details only after the results of these "stress tests" are known?
D'Arista: My own proposal is that the Federal Reserve should take on the situation itself. The Federal Reserve is already proposing to become a bank -- has become a bank. The Treasury is going to use $100 billion to capitalize the Fed to go out and buy the [toxic] asset-backed securities, and that's not a bad approach. It allows the Fed to actually take action quickly and to deal with a market that is frozen. The Fed should take the active role with the toxic assets. They should be buying them under repurchase agreements, which means that they can sell them back to the banks when the prices stabilize and either take a profit or a loss, depending on how things go.
RFE/RL: The whole financial crisis began with lenders giving loans they should have realized could not be repaid. Is that still the primary problem we face? And if it is resolved, would that considerably ease this crisis?
D'Arista: What I think is at the heart of this problem is the need to protect the capital of the financial sector in general. And I'm concern that this [Geithner] proposal is bank-based; it doesn't understand that the toxic assets are out there in every financial institution, that they are responsible for wiping out over $2 trillion of net worth of the household sector, and that we have to deal with it as a holistic situation -- not just save these major banks.
RFE/RL: Some economists critical of Geithner's plan say he's missing the point of the crisis. They say we're not merely experiencing a panic, which can be rectified largely by restoring confidence in the financial system. They say it's really about banks simply not having enough money to operate. What's your view?
D'Arista: I would tend to agree with this. These banks are insolvent. Let's face up: The issue here is insolvency. The Fed keeps trying desperately to pump out liquidity, but it's not working. If you were dealing with a financial panic and restoring confidence, presumably that would happen (banks would end up having plenty of money). But liquidity goes out, we make these capital infusions, and nothing happens.
So the issue is: Why? Why doesn't it happen? And my take on it is that you have a market-based system in which -- I think the estimate now is that half of the balance sheet of the commercial banks are holdings of securities, not direct loans. They don't directly lend any more. But they hold in portfolio tradable assets which therefore have to be marked to market [their value must be regularly updated based on the market]. And that's where we are. And I don't this plan addressing that problem.
RFE/RL: Another recommendation that's been gaining favor among economists is that the Obama administration shouldn't try to save banks whose assets are worth less than their liabilities. Do you agree?
D'Arista: Yes, in my view. Those banks are insolvent. Gradually allow those banks to go. Move those deposits into other institutions. Another way to go would be say, "Let's just create some new banks. Use these capital infusions to put into a bank that is clean and let it go forward and buy assets and begin to operate with confidence." So that's another way to go.
RFE/RL: When Obama nominated Geithner, many said he would be an important asset to the White House economic team because he would be the best spokesman for the president's policies. Do you think Geithner did well in his first effort as spokesman?
D'Arista: No, I don't, but at the same time, this is a new role for him and he might grow into the role. What I think was a great mistake which he has made was when he said [last month] that the Chinese are manipulating their currency. You know, the secretary of the treasury of the United States is going to have to deal with China. That was not a very diplomatic or sensible way to approach the Chinese.
In an interview with RFE/RL correspondent Andrew F. Tully, D'Arista says Obama's economic team seems to be misidentifying what needs to be fixed, that the plan leaves too much to chance, and that Geithner isn't a good spokesman on Obama's economic policy -- at least not yet.
RFE/RL: What is your overall assessment of the financial rescue plan that Secretary Geithner outlined on February 10?
Jane D'Arista: I think it's disappointing; I think it lacks clarity, I don't know that it will work. It's troublesome for a number of reasons. It's supposing to put more capital into banks without the assurance that that capital won't also be at risk -- without the assurance, that is, that they're going to be able to handle the toxic assets.
That part of the program is very vague. My concern about it is that, while I concede that they want to have the market price, these assets, the market price -- as many have noted -- is likely to be too low, and the banks know that if they sell, there are going to be charges against capital.
RFE/RL: What about the plan to induce private investors to share in buying up the banks' toxic assets?
D'Arista: The concern is whether the private sector really has the ability to participate in this variation of the "bad-bank" proposal [under which bad loans would be segregated from good assets in funds known as "bad banks"], even with government guarantees. Because many of them, in order to do so, are going to have to borrow the money to do it. They are facing their own capital problems, and where they would get this money is problematic, because typically they have borrowed from the banks, and the banks are not going to lend to them.
RFE/RL: Maybe there's a reason, at this early stage, for a lack of clarity in the Geithner plan. He said the federal government will conduct what he called "stress tests" on banks needing help to determine the exact extent of their holdings of toxic assets. Isn't it best to draw up the details only after the results of these "stress tests" are known?
D'Arista: My own proposal is that the Federal Reserve should take on the situation itself. The Federal Reserve is already proposing to become a bank -- has become a bank. The Treasury is going to use $100 billion to capitalize the Fed to go out and buy the [toxic] asset-backed securities, and that's not a bad approach. It allows the Fed to actually take action quickly and to deal with a market that is frozen. The Fed should take the active role with the toxic assets. They should be buying them under repurchase agreements, which means that they can sell them back to the banks when the prices stabilize and either take a profit or a loss, depending on how things go.
RFE/RL: The whole financial crisis began with lenders giving loans they should have realized could not be repaid. Is that still the primary problem we face? And if it is resolved, would that considerably ease this crisis?
D'Arista: What I think is at the heart of this problem is the need to protect the capital of the financial sector in general. And I'm concern that this [Geithner] proposal is bank-based; it doesn't understand that the toxic assets are out there in every financial institution, that they are responsible for wiping out over $2 trillion of net worth of the household sector, and that we have to deal with it as a holistic situation -- not just save these major banks.
RFE/RL: Some economists critical of Geithner's plan say he's missing the point of the crisis. They say we're not merely experiencing a panic, which can be rectified largely by restoring confidence in the financial system. They say it's really about banks simply not having enough money to operate. What's your view?
D'Arista: I would tend to agree with this. These banks are insolvent. Let's face up: The issue here is insolvency. The Fed keeps trying desperately to pump out liquidity, but it's not working. If you were dealing with a financial panic and restoring confidence, presumably that would happen (banks would end up having plenty of money). But liquidity goes out, we make these capital infusions, and nothing happens.
So the issue is: Why? Why doesn't it happen? And my take on it is that you have a market-based system in which -- I think the estimate now is that half of the balance sheet of the commercial banks are holdings of securities, not direct loans. They don't directly lend any more. But they hold in portfolio tradable assets which therefore have to be marked to market [their value must be regularly updated based on the market]. And that's where we are. And I don't this plan addressing that problem.
RFE/RL: Another recommendation that's been gaining favor among economists is that the Obama administration shouldn't try to save banks whose assets are worth less than their liabilities. Do you agree?
D'Arista: Yes, in my view. Those banks are insolvent. Gradually allow those banks to go. Move those deposits into other institutions. Another way to go would be say, "Let's just create some new banks. Use these capital infusions to put into a bank that is clean and let it go forward and buy assets and begin to operate with confidence." So that's another way to go.
RFE/RL: When Obama nominated Geithner, many said he would be an important asset to the White House economic team because he would be the best spokesman for the president's policies. Do you think Geithner did well in his first effort as spokesman?
D'Arista: No, I don't, but at the same time, this is a new role for him and he might grow into the role. What I think was a great mistake which he has made was when he said [last month] that the Chinese are manipulating their currency. You know, the secretary of the treasury of the United States is going to have to deal with China. That was not a very diplomatic or sensible way to approach the Chinese.
