Fed chair Ben Bernanke’s gave a speech yesterday at the London School of Economics which noted that, while “more capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets,” other tools will need to be deployed.

  Moreover, the huge sums already poured into the banks have failed to get credit moving again, their primary purpose.

Edmund Andrews and Eric Dash report in today’s NYT that we’re almost certainly going to continue course despite that.

Mr. Obama seems to know it; a week before his swearing-in, he is lobbying Congress to release the other half of the financial industry bailout fund. Democratic leaders in Congress seem to know it, too; they are urging their rank and file to act quickly to release the rescue money.


The most glaring example that the banking system needs even more help is Citigroup. Though it already has received $45 billion from the Treasury, it is in such dire straits that it is breaking itself into parts. Like many banks, Citi is finding that its finances keep deteriorating as the economy continues to weaken.

Even some of the bailout program’s harshest critics acknowledge that things most likely would be even worse without it, and that the bailout had accomplished its most important goal, which was to prevent a complete collapse of the financial system. Since last September, no major banks have failed and the credit markets have thawed somewhat.

Former McKinsey consultant and software entrepreneur James Kwak sees a vicious cycle afoot:

In a nutshell: as the economy gets worse, more and more loans default, eating into banks’ capital cushions; investors are still nervous about all those toxic assets; and the continuing collapse of the housing market hurts all of those mortgages and mortgage-backed securities banks are holding. And as banks teeter toward insolvency, people stop lending them money, and they stop lending people money.

So, like it or not, continuing to prime the pump in hopes that it’ll do the trick is likely the only viable option policymakers have available.  Simon Johnson, former chief economist of the International Monetary Fund, is a professor at the MIT Sloan School of Management, argues that we’re operating blindly and have little choice but to continue.

The problem today is that we just don’t know if any major bank is well capitalized; there are too many black boxes that may contain toxic assets.  At best, this is a brake on the positive effects that should come from the fiscal stimulus.  At worst, we still have a major system issue on our hands.

And there is no reason to think that $350bn is enough to handle this problem.  The original $700bn was obviously an arbitrarily chosen number, and the money has been spent so far in a rather unplanned manner.  What we do next should not be constrained by the fact that there is a check for $350bn waiting to be picked up.  We should design a systematic recapitalization program, figure out what it will cost, and get on with it.  My working assumption, based on the published analysis of the IMF regarding losses relative to private capital raising, is that $1trn – properly deployed – should do the trick.

It’s worth remembering, too, that this is an international crisis. Alexei Monsarrat, director of the Global Business and Economics program at the Atlantic Council, says that, “The question will continue to be how these stimulus packages are going to interact with each other at the global level. While they may still not be enough, the sums the U.S. is offering up are huge, and other countries are to a certain extent going to free ride on the back of the American stimulus. So the choices the U.S. makes in directing its funds has major importance for the globe.” He adds that, “The fact that the Germans finally decided to come to the table with a package will help ease things in Europe, especially if we decide to focus more on our banks rather than straight consumption, but it will still alter the picture if we shift resources to Citi instead of tax cuts.”

The beauty part is that we’ll never know what, if anything, worked.  One presumes this crisis, like all its predecessors, will pass.  When it does, analysts will cherry pick from among the myriad solutions we threw at the problem as evidence that their preferred solution is what did the trick.  But it’s not inconceivable that doing nothing — were that a politically viable option —  would have been just as effective.  

James Joyner is managing editor of the Atlantic Council.  

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