Q: What is the Geithner Plan?
A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world’s largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off–in either case at an immense profit.
Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn’t make back its money?
A: Then we have worse things to worry about than government losses on TARP-program money–for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.
Q: Where does the trillion dollars come from?
A: $150 billion comes from the TARP in the form of equity, $820 billion from the FDIC in the form of debt, and $30 billion from the hedge fund and pension fund managers who will be hired to make the investments and run the program’s operations.
Q: Why is the government making hedge and pension fund managers kick in $30 billion?
A: So that they have skin in the game, and so do not take excessive risks with the taxpayers’ money because their own money is on the line as well.
Read it all–and the discussion.
Update:: Paul Krugman doesn’t like the plan.
“Paul Krugman doesn’t like the plan” – neither do I. It’s simple. The government should not be running the economy. That’s the markets job.
I don’t usually agree with Krugman, who is all for the government to take over everything in the economy as far as I can tell. But I believe he did make the correct assumption here that this is President Obama’s one shot to get it right, or else he won’t have enough political capital to try again.
I’m not sure I understand the bit about political capital. Obama has all the votes he needs in the House and Senate to do as he pleases and when he pleases for at minimum two very long years.
The Republicans — and conservatives as well, which is not one and the same — lost the election in an overwhelming fashion. We have nothing. Obama won. He has it all. He may do what he likes without the slightest “political capital.”
He got all the political capital he needed for 24 solid months when the Presidency and the House and the Senate were won by collectivists.
Sarah,
I think that was true until he squandered a lot of his good will. Now that Evan Bayh has set up the group of 15 “moderate” Dems, and the Repubs seem to be holding strong except for the 2 from Maine and 1 from PA in the Senate, the Administration is not necessarily going to be able to count on 60 votes to end fillibuster anytime it wants on anything it wants. It will be very interesting to see if this union organizing bill is passed in the Senate. I have some doubts.
[url=http://www.nypost.com/seven/03232009/postopinion/opedcolumnists/why_bams_bank_fix_wont_work_160845.htm?&page=0]This writer[/url] says that something like this plan was considered and rejected by the Paulson team last fall. The article gives the reasons for the rejection.
I think Krugman assessed correctly that it is going to take a little time to see if these latest Geithner plan is going to work or not. Largely, TARP I has not panned out as hoped, and so basically Obama has one more major shot to fix things because the clock is ticking on 2010.
I think House members particularly are beginning to feel the heat of 2010 already. These massive bailouts and executive bonuses, etc., are not sitting well with a populace that wanted change. President Obama is basically following the same policies of the last few months of President Bush, just writ large.
My representative here in South Dakota is a fairly popular Democrat, and she tells me she is really hearing about it from the voters. There’s only so much money and time down the rat hole without noticeable results before voters start losing patience of President Obama. He’s popularity is already slipping as it is.