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Martin Feldstein on the Geithner Plan

By Anonymous

Martin Feldstein is generally supportive of the Geithner plan, but he says it needs to be expanded in three ways to ultimately succeed. The odd thing is, the Treasury has already announced two of his three proposed expansions.

Feldstein writes:

First, the Treasury must be prepared to inject capital into the banks that agree to sell mortgages. Without additional capital, the banks may not be willing to sell the mortgages that are causing their lack of confidence.

Umm, providing the banks with additional capital is exactly what the Treasury's Capital Assistance Program (CAP) is for:

Should [the bank stress test] indicate that an additional capital buffer is warranted, banks will have an opportunity to turn first to private sources of capital. In light of the current challenging market environment, the Treasury is making government capital available immediately through the CAP to eligible banking institutions to provide this buffer.

Feldstein continues:

Second, cleansing the banks' balance sheets will also require much more Treasury money for equity investments and loans. The current plan to remove $500 billion of impaired assets will not be enough to cleanse the banks' balance sheets to a point where they can be confident enough about the remaining assets to resume lending.

The Treasury has already stated that the PPIP "will generate $500 billion in purchasing power to buy legacy assets ? with the potential to expand to $1 trillion over time."

It's almost as if Feldstein hasn't been paying attention. Very odd.

Full post as published by Economics of Contempt on April 04, 2009 (boomark / email).