Being Tim Geithner

Justin Fox takes a crack at listing all the possible reasons that the administration might be following its current banking strategy (and offers me a kind welcome; thanks Justin!). He says he's leaning toward the following two explanations:

- It's the proper course of action, because most banks will be able to earn their way out of their problems if given some time and forbearance by regulators. This is what people within the banking industry seem to think, and non-banker John Hempton has done a good job of articulating this view on his blog.

- Geithner and his pals in the White House would love to follow Johnson and Krugman's advice, but it would require hundreds of billions, maybe trillions of dollars more in up-front appropriations to keep the banking system solvent. And Congress is too "skeptical, angry, and often stupid" to approve anything like that.

I agree with him, and I also suspect that knowledge of the Congressional limitations on available funding is probably leading the administration to convince itself that the first explanation really is the right one -- that the banks will be fine if given time. I have a feeling that if budget constraints were suddenly eased, the administration's view on recapitalization might begin to shift. Along those lines, here's an interesting idea from Felix:

Just as the original TARP was designed to buy up toxic assets and then got repurposed to inject capital directly into the banks, might the same thing happen with the PPIP? Might it be the case that investors who are wary of buying up hard-to-value toxic assets might be more keen on leveraging FDIC guarantees to buy common stock in public banks? And if Timmy asks her nicely, is there any way that Sheila Bair could say no to such a plan?

As he says, this wouldn't be the easiest tweak to the program to make. But the administration needs to find a way to get potential investors more interested in the program, and the stress tests are likely to lead to some uncomfortably large looking capital holes, at least at a few banks. I wouldn't be surprised if team Geithner was looking for ways to make this happen.

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