Details of Tim Geithner’s plans for dealing with toxic assets at US banks have been leaked: The New York Times article is here. From an Irish point of view, these plans are of interest not only as an example of how another country is dealing with its banking problems (the Minister for Finance has explicitly stated that he intends to learn from the approaches taken elsewhere before launching an Irish plan) but also because a successful resolution of the US banking problems seems like an essential ingredient in getting a world economic recovery going.
Author: Karl Whelan
I’m pretty sure many of our readers who missed it will get some entertainment from the archived version of Jill Kirby’s interview on Morning Ireland. For those who don’t know, Jill is the resident Austrian macroeconomic theorist at the Irish edition of the Sunday Times (double jobs as their personal finance expert, apparently.) Late in the clip, a highly puzzled Tim Harford of Undercover Economist fame struggles to cope with the full breadth of Jill’s Austrian vision.
On last night’s Prime Time, Brendan Keenan argued that it didn’t matter much how the government dealt with the problem of bad loans at the Irish banks, as long as they got on with doing it, though he noted he would be very reluctant to nationalise. Similarly, David McWilliams said that the key thing was to do something to deal with the bad assets and that it doesn’t matter whether we nationalise or not, i.e. that we needed to produce cleaned-up banks and it didn’t matter who owned them.
Let me explain why I think it does matter how we go about this and who owns the cleaned banks.
Today’s Irish Independent reports that Peter Bacon has delivered his report on bad bank and risk insurance proposals to the Minister for Finance:
The Government has been advised to set up a ‘toxic debt’ company to take over billions of euro worth of bad property loans from the banks.
I’ve written quite a few times about the bad bank proposal and don’t want to repeat myself. Still, it’s worth clarifying a couple of the nuances in the article because it likely illustrates the spin that the government would use to justify such a plan should it be adopted.
Kevin has raised the issue of differing attitudes in Europe and the US about the need for expansionary fiscal policy, with the Germans being particularly reluctant to adopt expansionary policies. This piece in today’s FT shows that some of the difference in attitudes reflects German concerns about US monetary policy.
The piece cites Christoph Schmidt, an adviser to Angela Merkel, as saying:
I see an inflationary risk in the US in the medium term because of the development of money supply there.
It also cites Klaus Zimmermann, president of DIW:
The central banks in the US and the UK are now literally printing money. This creates an inflationary potential that is difficult to stop.
In other words, rather than recommending that Europe follow the US in providing more fiscal stimulus, these influential German economists prefer to argue that US policy has already become dangerously expansionary and provides a bad example.
In my opinion, these statements illustrate three popular misconceptions.