THE PLANK MARCH 25, 2009
I'm not the first person on this blog to recommend the FT's Martin Wolf as a must-read financial columnist. He's the best, in my opinion, if only because he a) gets apparently as much space as he wants and b) has a uniquely non-US perspective, a critical point of view in a crisis that is only partly about the American economy.
Today's column is a pessimistic look at the Geithner plan; I'll save you the details, but there's one point that jumped out:
The one way out, on which the success of Monday's plan might be judged, is if the greater transparency offered by the new funds allowed the big banks to raise enough capital from private markets. If that were achieved on the requisite scale--and we are talking many hundreds of billions of dollars, if not trillions--the new scheme would be a huge success. But I do not believe that pricing legacy assets and loans, even if achieved, is going to be enough to secure this aim. In the context of a global slump, will investors be willing to put up the vast sums required by huge and complex financial institutions, with a proven record of mismanagement? Trust, once destroyed, cannot so swiftly return.
This is the real unknown behind the question of pricing these assets correctly. It's not just a matter of returning the market to a previous status quo; it's a matter of locating the price, if there is one, at which investors are willing to set aside their enormous amount of accrued suspicion. Keep in mind, too, that their trust was always contingent on the efficiency of a vastly complex set of financial vehicles, many of which are now kaput. Of course, there's a price for everything, and the market will find it. But will it be too high for Treasury to bear?