Options to the Latest ‘Absolutely Essential’ Bank Plan

Looking back over how corporate “media abandoned any pretense of objectivity in pushing the original TARP back in the fall,” when “they eagerly pushed the story that the economy would collapse if the TARP did not pass,” Dean Baker (Beat the Press, 3/28/09) recalls how “media never told the public that the Fed had the ability to takeover the banks in the event of a national emergency and it had plans to do exactly this back in the early ’80s debt crisis.” Which makes it somewhat unsurprising that “the new line that being pushed to argue that there is no alternative to the Geithner plan is the claim that Obama would need congressional authorization to have the FDIC take over bankrupt banks”:

Is that so? It’s not clear why. The law authorizes the FDIC to take over bankrupt banks. Under the law passed by Congress, the FDIC is supposed to take over Citigroup, Bank of America and other zombie banks.

It’s likely that the FDIC would not have enough money to pay for cleaning up these zombies, especially if it pays off the banks’ bondholders. (It has no legal or moral obligation to pay these bondholders, unlike FDIC-insured deposits.)

The Fed could almost certainly lend the FDIC the necessary money, as it is doing under the Geithner plan. The Fed can pretty much do whatever it wants, so it is not clear why anyone would think it could give money to subsidize banks through the Geithner plan, but not to clean up the banks’ mess.

Of course, the other story is interesting also. Suppose that the FDIC seized the bankrupt banks and lacked the funds to clean up the mess. Would the Republicans allow the banks’ bondholders to get cleaned out? That doesn’t seem likely, but it might be fun to watch.

The underreported “fact is that the banks and their political allies have lied to the public continuously throughout this crisis to get more taxpayer money for their pockets. It is irresponsible to take anything these people say at face value at this point.” See the FAIR magazine Extra!: “Going All Out for Bank Bailout: Media Paint Crisis as Too ‘Urgent’ for Skepticism” (1/09) by Dean Baker & Kris Warner