NYU professor Nouriel Roubini — who earlier this week expressed some lukewarm support for Treasury Secretary Timothy Geithner’s bank rescue — said today that even if the plan is successful, it won’t solve our banking problem or dispel the need to nationalize insolvent institutions:
In my view you can apply the Geithner plans to the banks that are solvent, but illiquid and undercapitalized. But you can not apply them to banks that are insolvent. So first you have to do a stress test, and then figure out through a triage the banks that you should rescue and those you should take over. So I’m still of the view that some banks are going to have to be nationalized, and for them the plan does not apply.
As The Economist put it, “if America wants to avoid the fate of Japan in the 1990s…it is vital that its banks face reality“:
Done rigorously, the stress tests could force the banks to come clean about their balance-sheets and lead to the forced sale of assets into the government’s toxic-asset programme. If a bank cannot raise the capital to offset its losses, it should be deemed insolvent and temporarily nationalised. Mr Geithner’s proposal is part of a process that could lead to more certainty — even healing — in America’s banking system. But only if he has the gumption to turn his half-plan into a whole one.