Felix Salmon mischaracterises my views…
In particular he says
The status quo, absent any Treasury proposal, is basically the Hempton plan: let profitable-but-insolvent banks work their way slowly back to solvency by making large operating profits and not paying dividends. But the problem with the Hempton plan is that it only works on a kind of don't-ask-don't-tell basis: the banks can't be publicly insolvent, since then they need to be taken over by the government.
No. My view is that we should have nationalisation after DUE PROCESS. My view is that very few things will be nationalised – but I could be wrong.
What I like about the Geithner plan is that it provides PRICE DISCOVERY.
The price discovery gives regulators a process for marking the banks' books. The bank “stress test” is no longer a “self assessed exam in which the punishment for failure is death” but an externally assessed exam, assessed by (admittedly subsidized) private money.
Once you have the true bank capital position determined you can allow the banks with adequate capital to muddle through (possibly with government liquidity support) and force the insolvent banks to raise capital. If they can’t raise the capital you nationalise them.
As the exam is now objective – not self assessed – a lower capital standard (say a third normal) should be allowed. High capital standards are really required in part because banks lie. If they can’t lie a lower standard should be acceptable. Moreover you suspend dividends whilst they muddle through.
Now the Geithner plan – done on a larger scale – can also support another policy objective. If a bank comes to the Treasury and says “we are illiquid – help” the Treasury can now say “sell some assets”. The bank cannot any longer claim there is no market for those assets – they can sell them to the Geithner plan fund(s).
When they are forced to sell them the difference between illiquidity and insolvency will become clear. If the assets sell near their book value then the bank really is just illiquid. If large haircuts are required the bank is insolvent. The government response can be dictated by a market price.
I never advocated that muddle through is the right policy. I just happen to think that muddle through will work for most banks because most banks are not that insolvent.
But – after this process – I could be found to be wrong. Very wrong.
And we will have nationalisations. And they will not appear as theft because markets determined who was solvent and who was not.