Monday, March 23, 2009


The New York Times' resident Nobel Prize winning economist Paul Krugman on the latest version of the bank bailout plan:

Financial Policy Despair

But the Obama administration, like the Bush administration, apparently wants an easier way out. The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.


But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

More here.

So what Obama is proposing is a public-risk/private-profit venture. If these unnamed investors picked by the government to buy up what economist and uber-blogger Atrios calls "Big Shitpile," that is, the mortgage-backed toxic assets, manage to make some money in the process, they get to keep it, if they lose money, however, they've lost taxpayer money, our money, not theirs.

How can this possibly be described as harnessing "the expertise of the market"? Market incentives simply do not apply in this situation. To these investors, it's Monopoly money, free money to wheel and deal, with no chance of loss. For them, anyway. To the American people, however, these probable losses are very real, indeed.

Look, the bottom line here is that most of the money lost in these toxic assets is gone forever, burned up by the bursting of the real estate bubble, and the only way out is for the government, the American taxpayer, to eat the loss. The only question is how we're going to eat it. What Obama and his Treasury team of Wall Street insiders want is to preserve, as much as possible, the banking and finance system that caused the mess in the first place, and to spread around to these people as much wealth as possible, greatly upping the ante on what capitalists call "moral hazard," or more simply, rewarding lunatic financial behavior with cold hard cash, thereby guaranteeing that lunatic financial behavior will continue.

There's gotta be a better way.

Krugman briefly spells out the time honored solution to such crises: the government guarantees much of this debt for solvent banks, while taking over and reorganizing insolvent banks. Historically, this works. Yes, taxpayers would take a huge loss, as we did during the S&L crisis of the late 80s, but the traditional route deals directly with the "moral hazard" problem, removing permanently the financial entities that caused the crisis, and does so much more efficiently, spending less taxpayer money, than the bizarre Monopoly money scheme Obama's banker pals are proposing.

If President Obama is really serious about this harebrained plan, I think it is now safe to say that in many ways he is little better than Herbert Hoover was during the opening years of the Great Depression. Or George W. Bush during the last eight years. Okay, in many ways Obama is actually better than Bush, who would have tried to tax cut us out of this Great Recession, but for this crisis, the financial and banking crisis, Obama is exactly the same as Bush. That is, like Bush, Obama is Wall Street's man.

And that's change I cannot believe in.