Saying "Enough" to the Banks

As Timothy Geithner dithers, the Congressional watchdog on the bank bailout, Elizabeth Warren, is previewing a much tougher attack.

"We want to ensure that the Treasury gives the public an alternative approach," she tells the Guardian about her worries that banks won't recover while being fed subsidies. "When are they going to say, enough?"

"The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous," she adds.

Professor Warren, head of the oversight committee monitoring the government's Troubled Asset Relief Program, will call for shareholders to be "wiped out." saying, "It is crucial for these things to happen. Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade."

Geither meanwhile is on TV hemming and hawing about possible "restructuring" of banks in the future as White House economic adviser Lawrence Summers plays down his $5.2 million gig last year with a hedge fund business as "a part-time job."

The Times runs an OpEd argument that the crisis needs to be "tackled head-on, not by propping up failing banks" but seizing them, stripping toxic assets and auctioning them off.

It's looking more and more like the most crucial restructuring needed may be at the White House economic team. When will the President say "Enough"?

Rethinking Risk

In all the replays of what went wrong with the economy, the recurring theme is the failure of risk management--by the government, Wall Street and overreaching home buyers.

Over the weekend, we get disheartening replays of how the Bush Administration abdicated responsibility for regulation and how greedy hotshots at Citibank created a mess that taxpayers will now have to clean up with billions in a bailout.

"In normal times," the Economist says in its piece on Treasury Secretary-to-be Timothy Geithner, "risk aversion damps economic cycles; in a crisis, it accentuates them, leading to withdrawn credit, evaporating liquidity, margin calls, falling asset prices, and more risk aversion. 'The brake becomes the accelerator,' as he puts it."

So we have a topsy-turvy world now in which prudence that has morphed into fear is causing the freezing of credit, and the kind of gambling that caused the problem is the prescription for curing it:

"Mr Geithner understands better than almost anyone that in crises you throw out the forecast and focus on avoiding low probability events with catastrophic consequences. Such judgments are excruciating: do too little, and you undermine confidence and generate a bigger crisis that needs even bigger policy action. Do too much, and you look panicked and invite blowback from Wall Street, Congress and the press. At times during the crisis Mr Geithner would counsel Mr Bernanke on the importance of the right 'ratio of drama to effectiveness.'”

For those of us who grew up with a Depression mentality (my parents wanted me to be a teacher because in hard times they still have jobs), this upends a lifetime of trying "not to live beyond your means."

We watch in wonder as a beleaguered government frantically throws billions into rescuing institutions that broke all the rules of our lifetime and wonder, when this is mercifully over, how will we get back to a sane balance of risk and reward to help our children and grandchildren pay for all this madness?

Wall Street Life Preserver

A stock market starving for reassurance bounced up 500 points late this afternoon on reports that Timothy Geithner, president of the New York Federal Reserve, is going to be Barack Obama's Treasury Secretary.

For a look at what he will bring to the crisis, a piece by Noam Scheiber in the New Republic is a good place to start, reporting an almost picture-perfect combination of the kind of intelligence, judgment, temperament and experience for that crucial position.

Wall Street was in need of a life preserver to keep from drowning in panic, and the Administration-to-be threw out one that should buoy investors up, through the weekend at least.

So much for the theory of releasing only bad news on Friday nights.