Financial genius, noted tax cheat, and Treasury Secretary Tim Geithner has unveiled his new plan for solving the credit crisis and pulling the country up from its recession. He wants to buy up the toxic assets that are clogging up financial institutions. That’s not a terrible plan at its core. One of the biggest problems banks have right now is that they’re holding a truckload of bad assets they can’t sell right now because no one really knows what they’re worth. Thanks to “mark to market” rules, they are forced to price their assets at a far lower value than they are likely worth and they have to keep a certain amount of cash on hand.
So it would be a great boon for the banks not to have those assets on their hands anymore, even if they have to sell them at a fraction of their real (not the M2M) value. Meanwhile, the government can afford to hold those assets until their value becomes apparent. At that point — perhaps 3 or 4 years down the road — the government can sell them. Optimistically, the government would be able to sell them at a discount but more than they paid for them, netting a small profit. Even if there’s no profit, the government takes a relatively small hit of perhaps a couple hundred billion dollars but the banks escape substantial damage and they have plenty of money to lend.
If that looks familiar to you, it’s because you’ve basically seen this plan before. It is, essentially, the very first TARP plan proposed back in the salad days of September that cost us $700 billion.
Of course, that plan fell apart almost immediately as Bush SecTreas Hank Paulson and his advisers (including Geithner who was the head of the New York Fed at the time) decided to spend the money bailing out financial giants like AIG on the theory that if they folded, they’d take out other giants like Goldman Sachs (a theory that turned out not to be true.
But the core idea that if the government could buy up the bad assets and just hold them until they were salable is a sound idea. I’d rather we killed the mark to market rules and ended government meddling in things it doesn’t understand, but since we’re already into this thing for a couple few trillion dollars, spending another trillion to end it seems like we’re getting out cheaply.
The Geither plan, though, has a couple problems that I don’t know it can overcome. First, it relies heavily on private investment. I don’t know about you, but if I were a potential investor and I had just seen the way the people at AIG were treated, there’s no way in hell I’d trust the Federal government not to try to take away any profit I made and subject me to death threats for my trouble. Second, it exposes the rest of us taxpayers to all of the risk and none of the rewards. At least under the old plan, there was the chance that we could realize some small profit out of the venture. Not so with Geithner’s plan.
At this point, our government has made such a muddle of the situation that I don’t see any way out that would cost us less than another trillion dollars. I think if Geithner really wants to do something, he’ll go back to the original plan he helped put together in the first place then add in a bunch of fat tax incentives and tax rate cuts to help push lower-level consumer money back into banks. It wouldn’t be a perfect solution, but at least it would let everyone benefit a little bit from the recovery.
For more reading, check out Michelle Malkin. She’s less than excited. David Freddoso has a post with concerns from a member of Congress who understands this whole mess. It’s a good read and explains the concerns better than most you’ll read today.
(via memeorandum)
