Maybe Geithner Knows What He’s Doing

Pat Garofalo explains how the administration plan for a public-private partnership might actually work to clear up the financial system.

It’s also worth saying that “Geithner plan works” and “nationalize banks” aren’t genuinely exclusive possibilities. As Barack Obama was saying the other day, we have a lot of banks in this country. And among small banks already many have failed and been taken over by the FDIC, while others are okay and some are even prosperous. You could imagine Geithner’s plan achieving “price discovery” and it turning out that most of the big banks actually are solvent. Then those banks are in a position to raise private capital and go about their merry way. At the same time, price discovery could reveal that some of the big banks are genuinely underwater and need to be seized by regulatory authorities to prevent them from blowing up the economy. People’s policy ideas have tended to track disagreements about whether banks are suffering from a “liquidity crisis” (i.e., they have valuable assets but nobody will buy them) or a “solvency crisis” (i.e., their assets are actually worthless) but there’s no reason it couldn’t be some of both.