Michael S. Rozeff: The Basis for the Geithner Plan is Invalid

The pricing of the toxic assets of the banks is in line with the pricing of other risky assets. There is no evidence that prices of credit instruments are now reflecting fire sales or distress selling. The evidence, if anything, suggests that the prices are actually on the high side. This means that the liquidity rationale of the Keynesians has no basis in fact.

The findings are sure to be contested in the literature, as most research is. In the end, they will prove robust. They will hold up.

The debate on bank bailouts is broader than economics. It goes to a question of justice. Should one group, taxpayers, be forced to pay for the mistakes of another group, bankers? It goes to a question of freedom versus socialism and fascism. Should banks operate in a profit and loss system and bear the losses that they incur, or should they not, in which case the financial system becomes more socialist and fascist? Even before addressing these questions, if the Keynesian policy does not do what it is claimed, then in economic terms the Keynesian case falls.
The government and FED claim that the financial system lacks liquidity. They say that there is a market pricing defect or failure. This, they say, is why the bad loans (toxic assets) held by the banks are worth more than the prices that they are fetching in the market. These prices, they claim, are fire sale prices. The remedy, they call for and implement, is for the Treasury and FED to supply the banks with liquidity, i.e., bail them out. Thus, the government and the FED are directing trillions of taxpayer dollars to shore up weak banks by buying their bad loans rather than overseeing a judicial-like process of re-organizing the banks and cleaning out these loans in established bankruptcy-like procedures.

The Austrian position is that the financial system does not lack liquidity. The bad loans were overpriced to begin with, largely because the FED and government engineered a speculative bubble. The bubble burst. The loans were repriced in the market. The loans are now worth what they are bringing in the market. Thus, the government has no liquidity justification for bailing out the banks. The government’s economic rationale has no merit. Many banks are insolvent. On the economic merits, they should be allowed to fail, not bailed out.

This may seem arcane but it really does matter. Read it all–KSH.


Posted in * Economics, Politics, Credit Markets, Economy, Housing/Real Estate Market, 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 U.S. Government, Treasury Secretary Timothy Geithner

5 comments on “Michael S. Rozeff: The Basis for the Geithner Plan is Invalid

  1. tgs says:

    The last paragraph says it all.

  2. Katherine says:

    I talked to a banker friend of mine recently. He deals with “mid-size” commercial entities. His bank is lending money, as are most banks. They’re just lending money more carefully than in recent years, looking more closely at credit worthiness.

  3. Jeffersonian says:

    Rozeff is correct. Maybe he should teach our President how to [url=http://www.youtube.com/watch?v=Tr7zhnctF4c&eurl=http://hotair.com/archives/2009/04/06/obamateurism-of-the-day-14/&feature=player_embedded]speak Austrian[/url] so he can understand all of this.

  4. Harvey says:

    Is my understanding of history in error? In the great Depression I understand that ~7,000-9,000 banks failed and somehow the US survived. Another question – how many banks having a diffiicult time right now because they came into existence 2-3 yrs ago with hands outstretched to get some of that “cheap money”? I’m ready to be enlightened or agreed with. Nuff Said

  5. TACit says:

    I thought you were making a tongue-in-cheek reference to using economic terms as Rozeff does, #3, until I looked at the clip. Good grief – the President of the USA does not know that a form of German is the language of Austria. With his Columbia and Harvard education and all, not to mention that professionally he is surrounded by any number of Jewish Americans with German background (see Rahm Emanuel’s family history for an example). I’m speechless at his level of ignorance, and that of the voters who elected him.