March 23, 2009

Timmy's Folly

After six months and two administrations, it appears that Treasury Secretary Tim Geithner has come up with a bank rescue plan that rather resembles the one that Bush's Treasury Secretar Paulson proposed and then abandoned.

Rather than reorganize zombie and failed banks, the Feds will subsidize the purchase of "toxic" assets by investors, presumably hedge funds and sovereign funds. The Feds will insure them against downside risk.

The fundamental problem remains the same. If the assets are sold at current market value, providing another buyer will do the banks no good. If the assets are set above market value, the taxpayers are rewarding the banks for betting on the wrong horses. Of course, it's conceivable that these assets will turn out to be worth more than the current market price, but then, so might that swampland in Florida and that bridge over the East River.

I have said to my liberal sister, but not written here, that TARP, proposed by George Bush, puts the final nail in the liberal/conservative distinction as it has been understood in this country. If Bush was prepared to nationalize AIG and run a huge deficit for this purpose and to bail out the banks, the traditional notion that the GOP resisted government interference in the economy and deficit spending had become non-operational. The same for resistance to the expansion of executive power. Thus I feel justified in linking to Paul Krugman's piece today, in which he announces his "despair" over this plan:
The likely cost to taxpayers aside, there’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive.

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.

You might say, why not try the plan and see what happens? One answer is that time is wasting: every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost.

Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place.
I never thought I'd be agreeing with this man, but he's right. Put the zombie banks out of their misery rather than throw good money after bad.

As an anthropologist, I think you have to look at the real connections between people, not just at economic theory. What links Robert Rubin (Clinton's Treasury Secreary), Paulson, and Obama gurus Geithner and Summers, are personal ties of patrons and clients over time. The institutional link is Goldman, Sachs. In short, the same inmates are running the asylum, whether "D" or "R" is after their name.

Obama, of course, can't fire Geithner because he has no Plan B and losing Geithner so soon would discredit Obama.

In short, we are stuck.

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