Temper Expectations of Geithner's Plan

We want grand solutions from the federal government. Who can blame us? But grand solutions are unrealistic. They require too much pain. They create undue expectations.

And then they seem set for failure.

That was the story last week with TALF, right? Much-ballyhooed but then little participation. That will be the story with the Treasury's plan today, too. I can write it right now. "The Treasury Secretary's plan is much-ballyhooed, but there will be little participation -- why would a bank bother to take those losses? Why would a bank sell at a discount loans it would like to hold on to, particularly because no public-private partnership is going to pay what they are worth?"

All understandable. But in the newfound context of the Federal Reserve's decision to forbear -- as demonstrated by Ben Bernanke's insistence that there will be no more nationalizations -- it might not matter if we don't have giant participation. We just need some, any, to get things rolling and then we will, over time, get out of this problem.

Until Ben Bernanke stepped up in the vacuum of Treasury, and very forcefully said he would ensure there would be no more big bank failures, and until Barney Frank beat up on FASB to make sure that mark-to-market restrictions are going to be loosened, the relevance of the success of Geithner's plan was supreme. It was make-or-break.

It isn't any longer.

There is no longer a gun to the head of the banking system. We are accepting that Tier 1 capital is the standard -- you don't hear Bernanke talk about equity capital now, do you? We know the plan is to forbear, look the other way, provide the money necessary to get buy -- I wish that were formalized, but it hasn't been yet.

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