THE DEATH OF THE PUBLIC-PRIVATE INVESTMENT PROGRAM.

It seems that the portion of the Public-Private Investment Program concerned with toxic loans has been killed, mainly because banks don't want to participate. I was one of the few people defending the plan (word up, Soullite!) or at least trying to understand it's logic, so what does it mean that the FDIC is moving on? For one, this is the sort of "bold and persistent experimentation" that we want in this administration -- better to scrap a program that doesn't seem to be working rather than bull on with it. Ezra suggests that plan's hiatus could mean one of two things: that the banks are afraid of recognizing their insolvency by writing-down asset prices during sales, or that the banks are cool, yo, because they can raise private money now.

In fact, it's probably a combination of both. Remember, PPIP's overall purpose was to combine with capital backstopping and the other elements of the financial rescue plan to get lending going again. Lending has improved somewhat, mostly due to Federal Reserve programs, and the stress tests have offered some idea of what banks need more capital and where -- and it seems like they're going to be able to raise that capital privately. If that's possible, there is no need to subsidize them with the PPIP program. Keep in mind, though, that the Fed-backed version of PPIP, which focuses on securities based on toxic assets, is still presumably going forward. But the fact that things are improving a little bit, at least in the financial sector, doesn't mean that the problem of the toxic assets is going to go away -- they're still not worth what they're listed as in these banks' books. They'll be worth more, presumably, when the housing market eventually stabilizes. But what we're seeing here is a decision made mostly by the banks that they can tolerate the risk of having those assets on their books until they become more valuable .

Is that a risk that the government can take with the economy? I'm not so sure, but it's unclear to me what this Treasury department can do about it. It's clear thus far that the Treasury has been trying to get the banks back on their feet again without too much concern for what form that takes; many, including myself, are increasingly worried that the form our financial sector eventually takes will look too much like the old, bloated sector that became a pernicious influence on the economy, leading to crisis and recession. But as a colleague pointed out to me the other day, the real test of the administration will come with the unveiling, within weeks, of the new financial regulatory regime. If it represents a comprehensive attempt to deal with the problems we've seen now, and seriously limits systemic risk for problems we can't anticipate by shrinking the sector, that will indicate real change in the financial system.

-- Tim Fernholz