Toxic Asset Plan May Woo Investors, but Long-term Impact Is Unclear

…[DONALD MARRON] I hope the government has set it up that, once it gets going, they can change the terms, as the market gets more comfortable, as more confidence this thing is actually going to work, isn’t as concerned about what the Congress is going to do as they are in the case of TALF.

So this is getting things going. There needs to be flexibility in the future. I’m assuming Tim Geithner and Larry Summers have thought that through. So once we get it started, we can make sure it becomes a positive continuing force and not some kind of a windfall.

JEFFREY BROWN: Well, Mr. Krugman, go ahead. Argue back. That’s the argument is, you need to attract investors, so…

PAUL KRUGMAN: I don’t think that’s the issue, really. I mean, there’s a lot of people who’ve got money parked in the banks. The problem is that people — it’s the banks as institutions that are the issue, not whether people are willing to buy these particular assets.

In a way, we’d like to make the whole story of these assets go away. The only reason that they’re there, the only reason it’s an issue is because the banks have lost so much money that they are not effective at their job of passing funds from one end of the economy to the other.

This is not going to change that. I mean, it’s going to make some of the stuff sell for a slightly better price, but the banks are still going to be deep underwater, at least the troubled ones are going to be. It’s going to convey some windfall benefits to people who are holding some of this paper who are not actually crucial financial intermediaries.

Read it all. I am on the Paul Krugman side of the argument, believing this treats symptoms rather than the disease. I would love to be wrong–KSH.


Posted in * Economics, Politics, Budget, Economy, Federal Reserve, Office of the President, Politics in General, President Barack Obama, The 2009 Obama Administration Bank Bailout Plan, The Banking System/Sector, The Credit Freeze Crisis of Fall 2008/The Recession of 2007--, The National Deficit, The U.S. Government, Treasury Secretary Timothy Geithner

3 comments on “Toxic Asset Plan May Woo Investors, but Long-term Impact Is Unclear

  1. Jeffersonian says:

    From liberal economist Brad DeLong’s site:

    [blockquote]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.[/blockquote]

    Back to your warm fuzzies, folks.

  2. tgs says:

    We’re still back to the same bottom line – there should be no bailouts, stimulus’s, or whatever EVER. The American people must wake up and start fighting back. We really need a true opposition leader to stir the people as to what the real things to feel fury over are and this Geithner plan is a prime example.

  3. Dave B says:

    Lets see if I understand this plan. We take unvalued assets that are toxic (sort of like bundled subprime loans), attach a value to them (like the investment vehicles that got banks into trouble in the first place), have the tax payer guarantee them (like the Fannie Mae and Freddie Mac loans), and then sell them to investors at limited risks (like the garanteed subprime loans) creating a bubble in toxic assests only to have another collapse later!! Brilliant, why didn’t I think of that?