1) Give $50 billion to homeowners struggling with foreclosure. Details on this will come later but it is, in my opinion, a necessary element.
2) Institute a “stress test” to determine which of the remaining banks are insolvent. If they are found to be insolvent, then…
3) Establish a public-private entity to swallow up the bad assets and sell them later
The heart of the problem is this: how do you price those toxic assets?
Geithner seems to be calling in the vulture investors to buy up this junk as they have done before. But the vultures are unwilling to do so at this point because the banks won’t sell the bad assets at their true bargain-basement value.
It isn’t buyers who cannot be found. It’s sellers: the banks don’t want to sell at market prices because then they would have to take a massive loss on their books and be revealed as utterly insolvent.
As Nobel economist Joseph Stiglitz argues: the banks are already insolvent and just don’t want to admit it. If the housing market dropped one percent more, those 18-28 billion would fall to zero and the gig would be up officially.
I don't get why Secretary Geithner continue to insist that a public private partnership can somehow coax the big banks to sell their toxic assets at a price that won’t rob taxpayers?