When Paul Krugman, the liberal Nobel-Prize winning economist, says that the Geithner plan is severely and fundamentally flawed, then you know that we're both frakked and frelled.
You can read his column here.
Basically, the Geithner plan is operating under the fantasy that there is a way to get back to the warm and nurturing price levels of the peak of the bubble. Once there, everything falls into place and the world recovers.
That is exactly like the idea that I can go on a wild spending spree and then sell everything on eBay in order to pay off my debts. If I sell enough for more money than I paid, then I am in good shape.
The idiocy is more than simply mind-boggling, and since the beginning of March, the dollar is already starting to tank.
Let's take a look at the key quote:
The Obama administration is now completely wedded to the idea that there's nothing fundamentally wrong with the financial system — that what we're facing is the equivalent of a run on an essentially sound bank. ... there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.
But it's immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn't, that's someone else's problem.
Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.
This plan will produce big gains for banks that didn't actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won't be able to come back to Congress for a plan that might actually work.
What an awful mess.Oy vey. This is recipe for a disaster for the taxpayers and a huge windfall for those - some of them banks - who have the money to spend and who don't need any help.
The last book I read by Krugman I ended up almost throwing down in frustration because the man had become so patently and ridiculously partisan that he had become blind to reality. But since Bush has been out of office, and perhaps more importantly, after he won his Nobel, he's started to revert to the economist he once was.
Read and weep: this is the liberal's liberal economist telling us that the Geithner plan isn't about getting out of the mess: it is part and parcel of the mess.
Remember, unless you are part of the solution, you are part of the problem...