NPR held a live chat with Simon Johnson and Arnold Kling. I recommend reading the whole thing (it is not as long as it looks). The questions from the audience were surprisingly good.
Just in case you can’t be bothered, I have reproduced some of the exchanges below.
[Comment From Tim W.] Is it naive to think that this problem may be better solved by addressing the actual bad debt (i.e. defaulting loans/credit cards)? If the consumer debts were ‘bailed out’ wouldn’t that provide capital to the banks and allow them to start operating normally again?
Simon Johnson: Adam and Tim, I’d like a bailout just as much as the next person! But think what happens if we reduce all our debts, at government expense – who has what kind of incentive to be careful in the future…
Simon Johnson: this kind of debt forgiveness does happen in some countries, and the effects are not generally good. If you go down this road, you will get a very different kind of economy (and think of the lobbying fees!)
Comparison to the RTC:
[Comment From Renee] Wasn’t the Resolution Trust Corp for the S&L’s a nationalization? If it is different, please explain why…
Arnold Kling: What was great about the RTC was that it took over *closed* thrifts. That’s what we should be doing–closing the insolvent banks and only *then* dealing with them
On the need to do something:
[Comment From Chris F] “You don’t want to value these assets” because they are worth zero? Why are you denying reality? Look at the share prices of these banks. The market “knows” they are worth close to nothing yet we continue to throw good money after bad. No one has been able to explain why the banks going bankrupt would be such a bad thing yet.
Simon Johnson: Chris, I agree that the market thinks the large banks are out of business because their assets are worth substantially less than their liabilities…
Simon Johnson: and I agree that there is a basic and general denial of reality among bank executives and, maybe, among some government officials also…
Simon Johnson: But let me stress that mass failure of banks, or even the failure of one large bank, would create great difficulties – the Fed/Treasury thought the damage from the failure of Lehman would be limited (in September) and they were wrong
Nevertheless, a lot of the comments were along these lines:
[Comment From Bill Barry] Letting the banks fail is a very concrete proposal.
[Comment From Michael] I second Barry.
From what I have read of the Obama administration’s plan (due next week), it can be summarized as a simple two-step process. Step 1: Purchase (or insure) the banks’ bad loans. Step 2: Force them to make new bad loans.
[Comment From Giles] Here in the UK there is a lot of talk about ‘forcing the banks to lend more’. Does that mean anything practical?
Simon Johnson: Giles, that’s a great question. It means that the government is going to force banks to make loans to various kinds of borrowers. My guess is that this will go sadly wrong and just lead to more losses down the road; and, of course, to another taxpayer-financed bailout.
Grand finale:
Adam Davidson: I do want to hear what you guys think the future of banking will look like, in, say, five or ten years? Can we avoid having a handful of too-big-to-fail banks? Can we reduce the complexity that leads to systemic collapse?
Simon Johnson: Adam, sorry to be cynical, but right now I think we will end up with what we have. A small number of banks will be massize, politically powerful and in repeated need of taxpayer bailouts. This is not a good outcome. I feel sad to say this.
Simon Johnson: I agree with Arnold’s vision, but I don’t see this coming through our political process.
Is there any argument at all that the “toxic” assets institutions are holding are actually worth something. It’s hard for me to understand the idea that there’s just no market for them. It seems like if knowledgeable people knew there were real value in them, they would buy them and wait until everyone else figured out how valuable they are.
The idea that there’s just no market for them cannot be as stupid as it sounds. There must be something I’m not getting.