Tim Geithner has an article in the Journal explaining his toxic subsidy plan:
The financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions — so-called legacy assets — are either uncertain or depressed.
Nope, guess again. The problem is not banks declining profitable business; prospective lending decisions are independent of past actions. The problem is that the banks are undercapitalized, and the only way they become “properly” capitalized in this scenario is by the government massively overpaying and shoring up their books. Since people would figure that out, you have decided to be sneaky and use a bunch of fund managers as conduits of the subsidy. Shameful.
Furthermore, the prices of the legacy assets are only depressed insofar as the assets themselves are impaired. Mark Thoma – amazingly, trying to justify the toxic purchase plan about as convincingly as Milton exalted God in Paradise Lost – uses the metaphor of a car lot where an unknown percentage of the cars have engine problems and will blow up. He proposes government action:
The government could buy the cars itself, say at $7,500 per car, or $750,000 total for the lot, drive them around a bit (stress test them), wait for the bad ones to blow up, then sell the 50 good cars back to the public (who will no longer be fearful since the bad cars are out of the mix). If they can get anything more than $15,000 for each good car, they will make money on the deal.
The problem is, the government is only buying some of the toxic cars – otherwise it would have all of the assets of the dealership. And does anyone who has ever bought a car – or witnessed Wall Street’s behavior – seriously believe the government gets a random sample? No, the government gets the worst junk on the lot. Why?
If you ever feel the need to play three card monte, ask the dealer for a minor revision to the rules: instead of identifying the odd card, you will identify the two that are not odd. Suddenly, the guy isn’t interested in playing. If the banking crisis is as simple as the dumb market getting twisted around itself, we should just buy the good assets and the shareholders who ride with the bad will make a killing as they watch their impaired assets pay off. And, if that happens, good for them. Meantime, avoid the sucker’s game.
The biggest problem with Treasury’s insistence on sending money to every crony on Wall Street is that it is destroying any hope we have of accomplishing Obama’s real policy objectives. Most people have forgotten, but there was an entire campaign on getting the fundamentals of this country turned around, on fixing health care and getting us out of our wars and firming up our national finances. Slowly but surely, these goals are bleeding away:
“The practical implications of this is bankruptcy for the United States,” said Sen. Judd Gregg, R-N.H. “There’s no other way around it. If we maintain the proposals which are in this budget over the 10-year period that this budget covers, this country will go bankrupt. People will not buy our debt; our dollar will become devalued.”
Sen. Susan Collins, a Maine Republican who sided with Obama on his $787 billion economic stimulus plan, said she couldn’t support the White House plan this time.
“It would double the public debt in 5 years, triple it in 10 years. … That is not sustainable. It poses a threat to the basic health of our economy,” Collins said.
North Dakota Democrat Kent Conrad, chairman of the Senate budget committee, acknowledged, “We cannot have debt pile on top of debt.” He added: “In the short term, yes, we have got to have added deficits and debt to give lift to this economy, but longer term, we have got to pivot.”
LBJ did not want to focus his Presidency on a war in some far-off country with small men who would never give up. He simply could not bring himself to cut it off, and eventually it ate up his economy and his support until his dreams died.
Thanks for the informative post. I’ve been saying the same thing as you for a while. Eventually, all of these toxic assets are going to be liquidated, it just matters who is going to be stuck holding the bag. It’s looking more and more that it’s going to be the taxpayers. We’re trying to prop up every bank, no matter how many bad loans or investments they made. At some point, we are going to have to let the bad banks fail or we’re going to run out of money bailing them out. The Bank of England is out of money. When will the Federal Reserve run out of money? Or ink?