Is the Geithner Plan Working?

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As I mentioned last night, big banks are handing out big paychecks again.  Matt Yglesias says this is all part of the plan:

The Obama administration didn’t want large financial institutions to fail. They also didn’t want to try to get congress to appropriate funds on the scale that would be needed to take the banks over, clean house, and recapitalize them publicly. What they came up with was a strategy of implicit and explicit guarantees designed to allow financial institutions to recapitalize themselves through profits. And big profits mean big paychecks. This is an ugly solution to the problem, but for whatever it’s worth it’s working.

That’s true.  The idea that banks could be safely recapitalized via earnings was explicitly part of the Obama/Geithner plan.  And maybe this was safer than pessimists like me thought, since the two weakest banks, Citi and Bank of America, had already received massive federal guarantees on their toxic assets in addition to their TARP money.

Still and all, I’d caution that it’s only working so far. The Geithner plan leaves the banking sector fairly weak, and while this is OK as long as things continue to improve, it could yet become a big problem if there’s another shock and things take a turn for the worse.  So let’s hope there aren’t any more shocks.

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