Geithner’s Toxic Asset, Bank Plan Offers Nothing New To A Bad Idea

PAUL KRUGMAN BLOGS ON THE TOXIC-ASSET PROGRAM to be announced early this week: “The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won. The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. … And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved. To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad … assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

“But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem. Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard. This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work. What an awful mess.”

From:
http://www.politico.com/playbook/

Krugman blog: NY Times:
http://krugman.blogs.nytimes.com/?s
cp=2&sq=krugman&st=cse

Related:
Obama Talks Too Much: Time For Action
(Fire Geithner, for one….)

Obama Overexposed

 Threat of inflation sky high

Obama’s Katrina Moment Is Here Now

Obama Administration May Not Understand Economy

 Public Outrage Could Devour Obama Presidency

Financial Advice, Recovery, Trumped by Obama, Congress, Media, Polls
(Maybe Axelrod is giving better advice than Summers, Geithner…)

Protesters At Homes Of AIG Execs
.
Obama, Biden Chat Up Economy; Congress Talking “Stimulus II”

Rosy Talk From Obama and Gang is BS

Sen. Sherrod Brown, D- Ohio, pauses in the elevator after arriving on Capitol
Geithner

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