The Geithner plan, announced on Feb. 10, did not specify how the public/private partnership (PPP) will be used to buy troubled assets. Here is an idea. By following this, we can separate substantially all the potentially toxic assets from the balance sheets of major financial institutions. What remains will be undercapitalized for many, but with toxic assets removed, it will be relatively easy to attract new investors.
About a year ago, I started to compare seriously the current financial crisis to the Japanese crisis of a decade ago. I initially hoped that the policy responses by the U.S. policy makers would be very different from those by the Japanese policy makers and much more effective. In some aspects, such as monetary policy, the Federal Reserve has been more aggressive than the Bank of Japan was, although whether they will be successful in staving off the deflation remains to be seen. In addressing the problem of toxic assets and restoring confidence in the financial system, however, the U.S. government has not done much better than the Japanese government did a decade ago.
The American Dialect Society, which determines the word of the year every year, has voted “bailout” as the word of the year for 2008. If 2008 was the year of the bailout, 2009 may well become the year of the zombie, because bailouts of troubled banks and firms create zombie banks and zombie firms, which should exit the markets but manage to stay with help from creditors and the government. In a paper that appeared in the American Economic Review, I showed (with Ricardo Caballero and Anil Kashyap) how the zombie firms in Japan hurt healthy firms in the same industry, discouraged new entrants, and stifled growth.
Now the TARP (Troubled Assets Relief Program) has been transformed from a program that primarily buys troubled assets at financial institutions (as the name suggests) to a program that focuses on injecting public funds to supposedly healthy banks to recapitalize them. The program with the new emphasis, which I call the TARP II, is better than the original TARP in that it directly addresses the issue of capital shortage that is at the center of the current financial crisis, as many have argued.
I have just finished a short paper with Anil Kashyap, which reviews the Japanese experience with a series of asset management companies (CCPC and all that) and evaluates the TARP. The paper is available as an NBER Working Paper. Here is the abstract of the paper. The U.S. government is hiring asset managers to […]
To briefly remove myself from constant flow of news on the financial crisis, I attended a talk on environmental policy at our school. The speaker was Vice Admiral Conrad C. Lautenbacher, Jr., who is the administrator of NOAA (National Oceanic and Atmospheric Administration). NOAA collects various data and information on weather, climate, ocean resources, and […]
The answer is NO, as I explain below. The Senate has passed the modified bailout package. The TARP is still the central part of the package. As I argued earlier, attempts to use of asset management companies to deal with financial crises failed in many countries including Japan. The package does not have anything to […]
The Emergency Economic Stabilization Act of 2008 (EESA), which included the Troubled Assets Relief Program (TARP) as its core, has been voted down in the Congress. If one interprets this as a result of the Congress failing to act decisively, it is a bad news. But, given the problems of the TARP, this may be […]
Sunday night, the White House and the Congressional leaders agreed on the Emergency Economic Stabilization Act of 2008 (EESA), which includes the Troubled Assets Relief Program (TARP) as its central piece. Although the details of the program are still left to be specified by the Treasury, buying troubled assets is not the most effective nor […]
On September 24, Taro Aso, who became the leader of the Liberal Democratic Party (LDP) on September 22, was chosen to be the new Prime Minister of Japan, as expected. As I argued in my blog on September 15, he is one of the strongest supporters for the expansionary fiscal policy including tax cuts. He […]