the greatest depression

Toxic-Asset Plan Gets Somewhat Toxic Reaction

Today, Treasury Secretary Tim Geithner unveils the administration’s plan to set up a “Public-Private Investment Program” that will “provide a market for the legacy loans and securities that currently burden the financial system,” as he writes in his Wall Street Journal op-ed. Basically, the government is going to partner with private investors to bid for the toxic assets that are currently weighing down banks, loaning them money and taking on a share of the risk. Geithner writes that, over time, “this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets.” Hopefully. So far the reaction to the plan seems to be scattered: The Dow is way up (for now!), so that’s promising, but expert opinion ranges from cautiously optimistic to outright despair.

• Paul Krugman is firmly in the despair camp. He says the plan is “just an indirect, disguised way to subsidize purchases of bad assets,” and not much different from Hank Paulson’s proposal under President Bush. The taxpayer is burdened with all the risk: “if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt.” Simply put, “the real problem with this plan is that it won’t work,” and is a waste of time and of Obama’s limited political capital, which will make it harder to temporarily nationalize as Sweden did in the nineties. [NYT]

• Brad DeLong is frightened that he disagrees with Krugman, but disagrees nonetheless. The plan is “a positive step from where we are,” and we won’t be able to nationalize until we have “exhausted all other options.” [Grasping Reality With Both Hands]

• Kevin Drum also doesn’t accept Krugman’s assertion that the failure of this plan will make nationalization harder to achieve. “In fact, far from making nationalization more difficult, its failure would make it both inevitable and broadly acceptable. All by itself, that’s probably a good reason to let Geithner give this his best shot.” [Mojo Blog/Mother Jones]

• Tyler Cowen believes the plan “has some chance of succeeding and the relevant alternatives are also bad for the taxpayer.” [Marginal Revolution]

• Mark Thoma notes the “value in economic stability and security over and above whatever the government makes (or loses) on the actual financial transactions, and this must be factored into the evaluation of the policy.” He uses a car dealership as a helpful metaphor for the entire situation. [Economist’s View]

• Noam Scheiber is unclear “what the point” of the plan is: Are we helping the banks, “in which case we need to overpay for the assets,” or are we trying to “get a good deal on the assets for the taxpayer.” The Treasury wants to accomplish both, but “the two goals seem incompatible — a good deal for the banks is a bad deal for investors, and vice versa.” [Stash/New Republic]

• Felix Salmon wonders if Geithner could possibly sell this idea to Congress. [Market Movers/Portfolio]

• Joe Klein contends that “the success of this thing depends on the auction — and one question is whether some of those houses currently holding toxic assets can game the game in a way that inflates the value of their assets.” Still, the plan “makes sense.” [Swampland/Time]

• Conor Clarke points out that “the fact that we are subsidizing investor losses through a taxpayer subsidy can’t be considered totally crazy, because we do it all the time. It’s not what the FDIC is designed to do, but it’s what the FDIC does implicitly: it gives banks a subsidy to be reckless with other people’s money by insuring deposits.” [Atlantic]

• Henry Blodget believes that “Geithner is suffering from five fundamental misconceptions about what is wrong with the economy,” and that “no smart economist” thinks this will fix the economy. [Clusterstock/Business Insider]

• The Free Exchange blog says the Geithner plan “might be the best option, but the administration has manifestly not made the case that it is, and that’s a problem. If the president feels that this policy can work, he needs to sell it hard enough to buy enough time to allow it to work, and to allow him a second shot if it doesn’t.” [Free Exchange/Economist]

• Clay Risen is “extremely skeptical” because an auction system won’t necessarily prevent the government from overpaying for assets, and because he’s “wary of the idea that we can ever return to the market conditions that set the original value for these assets.” [Plank/New Republic]

• Joshua Zumbrun examines all the many possible outcomes of the plan. [Forbes]

Related: Inside Obama’s Economic Brain Trust

Toxic-Asset Plan Gets Somewhat Toxic Reaction