Tuesday, March 24, 2009

The Plan

Seems that Paul Krugman and Joseph Stiglitz don't like Geithner's plan. Krugman continues with:

"So now we have a bank crisis. Is it the result of fundamentally bad investment, or is it because of a self-fulfilling panic?

If you think it’s just a panic, then the government can pull a magic trick: by stepping in to buy the assets banks are selling, it can make banks look solvent again, and end the run. Yippee! And sometimes that really does work.

But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money."

Stiglitz said:

"U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives," Stiglitz said.

The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said."

And Atrios says:
"The issue isn't that they're worthless, the issue is that they aren't worth nearly as much as the financial institutions are pretending they're worth. Sellers have a huge incentive to not sell at lower prices because lower prices will potentially reveal that they're insolvent/essentially bankrupt. ...[T]he reason that the big players can make money while the gov't loses money is because of the no recourse loans, and the asymmetric upside/downside of the Geithner plan. They're buying shitpile mostly with gov't loans, and if there's money to be made they and the gov't benefit. But if the asset is shit, they don't have to pay back the loan, just hand over the asset. All this encourages institutions to overpay, so we get to pretend shitpile isn't so shitty until the gov't eats the losses."

If these guys hate the plan, then I hate the plan.

I think the situation we find ourselves in is this. We bought a new car. We drove it, maintained it and were happy with it. Then the dealer came over and destroyed it with a baseball bat. And now you have to pay him to repair it with no guarantee the work will actually get done in the foreseeable future. And you have to pay him before he starts the work and you have to pay him a bonus if he does a competent job.

And the politicians wonder why we're pissed.

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