A new RTC? Not like the old RTC

Massive injections of central-bank liquidity and talk of an RTC-like agency to absorb potentially vast quantities of bad assets gave the markets respite, but one wonders for how long. I remember writing about the S&L crisis and the role of the Resolution Trust Corporation nearly 20 years ago. The notion that the RTC is a model or precedent for the kind of action now being contemplated is questionable. The RTC swallowed hundreds of little thrifts whole. It was not primarily a selective buyer of bad assets from huge ongoing entities. And the assets it acquired through this process were much simpler (hence easier to value and dispose of) than the assets in question today. This is to say nothing of the scale. The S&L crisis seemed enormous in scope at the time. It was puny compared to the situation requiring resolution today.

Looking back from this distance, one thinks of the RTC as a success. That may be its principal virtue as a "model": it offers reassurance. At the time, however, the entire episode was a slow-motion mess, and politically fraught throughout. Almost from the beginning, the RTC was underfunded; more than once, its own collapse for lack of resources seemed imminent; and it was the subject of occasionally bitter, invariably partisan bickering for years. Democrats in Congress were usually reluctant to provide the additional funds requested by the Bush (senior) administration.

One thing the episode does underline--and this is far from reassuring--is the inescapably political character of a comprehensive, as opposed to ad hoc, response. Why was it the Fed, and not the Treasury, that quasi-nationalised AIG (not a bank but an insurance company, over which the Fed has no direct oversight responsibility)? Because the Fed has elastically-defined emergency powers that the Treasury does not. Deleveraging an entire financial system under duress is a protracted fiscal operation. In moving from instant-response-to-crisis mode to a comprehensive resolution regime which will have to be in place at huge expense for years, the Fed can no longer be the prime mover. And the Treasury will need legislation--not just whatever might be rushed through Congress next week or the week after, but on a continuing basis right through the next administration--to provide the authority and the cash for its actions.

When you look at the RTC model that way--take the current problem in all its seeming intractability; now give Congress a leading role--it is not so reassuring. But it will have to be that way. There is no alternative.

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