Geithner Bank Plan Emerges, Confirms ‘Zombie Ideas Have Won’
Geithner Bank Plan Emerges, Confirms ‘Zombie Ideas Have Won’
Both the New York Times and the Wall Street Journal are reporting details of the Obama administration’s bank rescue plan, which the Treasury Department is expected to roll out this week. As anticipated, it will create private-public investment funds, in which Treasury will provide financing for private investors to purchase toxic assets:
The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.
These details officially show that Geithner is hinging the rescue plan on the assumption that toxic assets have an inherent economic value and are not, as many analysts believe, relatively worthless. So, as Paul Krugman pointed out, “the zombie ideas have won“:
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. As Tim Duy put it, 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.
As we’ve discussed before, if Geithner’s assumption is right, then the plan could work. However, if he is wrong — as many feel he is — then he is creating a situation in which investors can cherry-pick truly depressed assets and leave the rest of the junk behind, thus making a huge, government subsidized profit without fixing the problem.
6 Responses to “Geithner Bank Plan Emerges, Confirms ‘Zombie Ideas Have Won’”
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As long as the FDIC, etc., continue to require mandatory re-financing at low rates on a proportion-of-income basis, then we’ll be fine. Sure, there will still be some foreclosures, but of people who did in fact act irresponsibly, who will be forced to get a job and rent. We need to make sure that they can get a job; otherwise it won’t work. So, on this related note:
Date: Sat, 21 Mar 2009 14:56:18 -0700
Delivered-To: jsalsman@gmail.com
Message-ID:
Subject: the “unusual strain” of paying interest on excess reserves
To: Scott dot Alvarez at frb dot gov
Cc: Tom dot Woodward at cbo dot gov, Margaret dot DeBoer at frb dot gov, OIGHotline at frb dot gov
Dear Mr. Alvarez:
In your letter of March 19, 2009, you state, “overnight federal funds
have tended to trade somewhat below the level of the interest rate
paid on reserve balances. In part, this development reflects the
unusual strains in financial markets.” It is useful to have a graphic
of what we are talking about here:
http://research.stlouisfed.org/fred2/series/WRESBAL
Are you aware of the extent that the fact that the Board of Governors
has been paying interest on excess reserve balances, above and beyond
the interest paid on required reserve balances, has caused those
unusual strains which have cause the target federal funds rate to be
set so low? On January 13, Ben Bernanke said, “the interest rate the
Fed pays on bank reserves should set a floor on the overnight interest
rate, as banks should be unwilling to lend reserves at a rate lower
than they can receive from the Fed. In practice, the federal funds
rate has fallen somewhat below the interest rate on reserves in recent
months, reflecting the very high volume of excess reserves, the
inexperience of banks with the new regime, and other factors.” Does
“the inexperience of banks with the new regime” include the fact that
the Board of Governors has been contradicting their own policy, with
simultanious inflationary and contractionary measures, nullifing their
ability to set effective policy in accordance with their primary
statutory mandates of price stability and full employment?
When will the Board of Governors consider excess unused capacity when
determining the resonable full employment target?
http://yglesias.thinkprogress.org/archives/2009/03/capacity_utilization.php
I expect that the information which you have been gathering in support
of my FOIA Request Number 2009200210 will show that relationship very
clearly. In Jeanne McLaughlin’s letter of February 6, 2009, she said
that you would need until February 19, 2009 to provide that
information. Do I have your assurance that that request is being
processed under the most recently promulgated FOIA regulations? In
any case, will you please let me know when my congresswoman and I can
expect to see that information? Thank you.
Sincerely,
[jps]
March 21st, 2009 at 6:24 pmDear WonkRoom Admins:
Please delete the “Delivered-To:” and “Message-ID:” headers, the blank line after the Subject line, and replace “cause ” with “caused ” on the fourth line of the second email paragraph above. Thank you. –jps
March 21st, 2009 at 6:30 pmOf course private investors will cherry pick assets. They have every incentive to do so – and there is absolutely nothing stopping them. They are not concerned about the welfare of the nation. This plan is just a huge wealth transfer from middle class and working class tax payers to hedge funds and rich investors.
March 21st, 2009 at 6:52 pmOne of the three programs will provide 97% government money to 3% private investment funding. Loans are nonrecourse, which means the private investors have limited exposure. They can return the assets or collateral if things don’t go well.
Private equity and hedge funds get another shot at corporafornication on the taxpayer dime.
March 21st, 2009 at 11:47 pmHelicopter Ben Bernanke is swamping us with Massive Quantitative Easing….The Undertow is likely to destroy us all!
http://fargoneworld.blogspot.com
March 22nd, 2009 at 12:41 amWell worth the read:
http://www.nytimes.com/2009/03/22/opinion/22rich.html
Frank Rich’s column on the financial shenanigans.
March 22nd, 2009 at 1:13 am