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Mike Benbow, Business Editor
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Published: Sunday, November 30, 2008
Treasury may be in over its head
By James McCusker Business columnist
Until 1967, the U. S. Coast Guard was part of the Treasury Department. It's time to bring it back home. Right now the Treasury could really use some people who know something about rescues.
It's not easy for Treasury to explain its rescue operations. Each week there seems to be a new, and bigger, rescue under way. During Treasury Secretary Henry Paulson's most recent testimony before Congress it was clear that the legislators were not happy with his responses to their questions. He seemed more than a little vague about what exactly he planned to do with the remaining hundreds of billions that he was authorized to spend on rescues.
Members of Congress were even less satisfied with his focus on banks and financial institutions. They questioned what the Bush administration was doing to help individual American homeowners, especially those in trouble. And they clearly were more comfortable with Federal Deposit Insurance Corporation Chairwoman Sheila Blair's plan to rescue homeowners facing foreclosure.
For a short while, it looked like we might be seeing the first signs of an economic policy discussion, something that we have sorely missed. Congress and the administration seemed to be considering two different approaches to fixing the economy: top-down versus bottom-up. Do we help banks or help individuals?
As it turned out, the discussion of the merits of top down versus bottom-up economic policies had to be postponed. It became apparent that the billions of dollars already injected into the banks weren't enough. Citigroup, one of the country's largest banks, was in the emergency room needing a transfusion and the banking system was again showing signs of hypothermia.
Undoubtedly, both Paulson and Blair were aware of Citigroup's deteriorating situation during their Congressional testimony but did not wish to discuss it during a televised hearing. No wonder Paulson was shuffling around enough to qualify him for an advanced placement slot on "Dancing with the Stars."
On Nov. 24, the Treasury Department announced that it had decided to inject another $20 billion into Citigroup in exchange for preferred stock. It also said that it would guarantee $306 billion worth of Citigroup's mortgage-backed loans and other similar assets. The FDIC, for its part, has announced that it will guarantee $1.4 trillion -- yes, "trillion" -- of U.S. bank debt -- essentially inter-bank lending -- so it, too, is engaged in top-down efforts to get the financial system working again.
By some calculations, the federal government has committed more than $7 trillion to contain the damage to our financial system and get the economy rolling again. This is a large number by any standard, and we should give some consideration to what it represents, what the real costs are, and what our other options might be.
The Treasury has now spent $45 billion on Citigroup preferred stock, for example, but that only becomes a cost if the stock price goes down. Otherwise it is simply a swap of one asset, cash, for another, stock. In the same way, the FDIC guarantee extended to inter-bank lending will only become a cost if a bank fails and doesn't pay back the money it borrowed.
Virtually all of the other commitments by the Treasury, the Federal Reserve, and the FDIC are either similar transactions -- exchanging one asset for another -- or loan guarantees. The federal government, in effect, is co-signing most of the banking system's liabilities. It is a huge extension of credit, certainly, but it is not yet a cost. In fact, the federal government has spent very little thus far on bailouts and rescues.
Some costs will actually be real. Part of the Citigroup rescue, for example, involves "fencing in" (Treasury's term) Citigroup's troubled assets and promising to absorb 90 percent of any losses. While that was done to reinforce Citigroup's credibility in financial markets, it will almost certainly produce some losses, although nowhere near $7 trillion.
The idea of trillions of dollars in losses would become real only if you really believe apocalyptic scenarios where we and everyone else are being transported to our destination in a hand basket. As much fun as these dire speculations are, though, it would seem reasonable to assume that under those conditions tabulating the accounting cost of these federal programs would not be our biggest concern.
The Treasury has no experience in managing diverse and demanding rescue programs and sometimes it shows. The Coast Guard is used to it. It even has experience in rescuing some people who really don't deserve it, something that Treasury is new to.
Putting the Treasury and the Coast Guard back together seems like a good fit. The rescues are a long way from over and Treasury can use all the help it can get.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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