Martin Wolf: "(Obama's) Timidity Is Depressing"



(image via ebrd)

An article gathering a lot of buzz among the chattering classes is markets reporter for the Financial Times Martin Wolf's Op-Ed about Timothy Geithner's $2.5 trillion bailout plan which met with a 380-point drop on The Street yesterday. Wolf argues that President Obama's "timidity is depressing," and that the current global economic crisis must be confronted with profound pessimism by "admit(ting) reality, restructur(ing) banks and, above all, slay(ing) zombie institutions at once." From FT:

"All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.

"Under the first view, the prices of a defined set of 'toxic assets' have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the 'super-SIV (special investment vehicle)' proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007.

"Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now (USDL $2.2 trillion), up from (USD: $1.4 trillion) just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at (USD: $3.6 trillion). Fortunately for the US, half of these losses will fall abroad. But, the rest of the world will strike back: as the world economy implodes, huge losses abroad – on sovereign, housing and corporate debt – will surely fall on US institutions, with dire effects."

Wolf says he leans in the direction of the argument that a sizeable proportion of financial institutions are insolvent. He is deeply pessimistic about the crisis and, interestingly, is critical of the Obama administration's "hoping for the best." Wolf continues, "The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalised financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government." More here.