Sunday, March 22, 2009

The Pros And Cons Of Timmy's Plan

Brad DeLong takes up the pro position on it, The Kroog takes up the con with his response to DeLong. Both are very much worth reading. DeLong's basic theory is that, well, the Geithner plan looks really good on paper.
Q: Why is the government making hedge and pension fund managers kick in $30 billion?

A: So that they have skin in the game, and so do not take excessive risks with the taxpayers' money because their own money is on the line as well.

Q: Why then should hedge and pension fund managers agree to run this?

A: Because they stand to make a fortune when markets recover or when the acquired toxic assets are held to maturity: they make the full equity returns on their $30 billion invested--which is leveraged up to $1 trillion with government money.

Q: Why isn't this just a massive giveaway to yet another set of financiers?

A: The private managers put in $30 billion, but the Treasury puts in $150 billion--and so has 5/6 of the equity. When the private managers make $1, the Treasury makes $5. If we were investing in a normal hedge fund, we would have to pay the managers 2% of the capital and 20% of the profits every year; the Treasury is only paying 0% of the capital value and 17% of the profits every year.

And that's a good argument. But it's based on the assumption that the problem is the toxic assets are critically undervalued. If the value of the assets goes up, the government makes money. If it goes down however, the government loses literally a mint.

The bottom line is this: the public-private partnership hedge fund beast by definition has to pay a premium price for these toxic assets and hope that the prices manage to go up above what the bank valued them at in the first place. Geithner has to.

The only way that happens is if the government creates and sustains another mega-housing bubble causing home values to explode across the country again, which will capsize the dollar completely in the process causing hyper-inflation to go with it.

This plan seems to be not only conducive to causing that scenario, but in fact it seems to be absolutely counting on it to happen. If Timmy doesn't pay the banks a massive premium, they won't sell, and they'll go under. This is nothing more than a giant accounting error, in other words...which is such a ludicrous assumption that it makes my chest hurt.

And that, ladies and gentlemen, is why the Gethner plan won't work. If all this was was an accounting error, then why not just absolve the banks of the accounting error and move on? It's because our entire economy is built on the shadows and assumptions that these trillions in toxic debts are real money that somebody owes somebody else. Without all that money actually existing, our economy ceases to exist.

Hell, we can't even figure out who owes whom what and how much!

And we're throwing trillions of real money into to hole to see if enough of it magically makes these assets worth something again.

2 comments:

Dolphy said...

A bubble economy is all we have left. Because of globalization we have hollowed out our economy to the point that the financial sector and its shenanigans are the ball game now. It seems clear to me the administration is banking (no pun intended) on another one. The outrage over the AIG bonuses while admittedly a small part of the problem IS REAL! People are paying attention. While the bonuses are to some extant symbolic symbolism is important. Krugman is right. If this does not work Congress will be hard pressed to give them another shot. The already massive redistribution of wealth occuring under a Democratic administration will not go unnoticed. Obama is in over his head. He is relying on the wrong people because he is not knowledgable enough about these issues himself. He is not addressing the issue of how to bring jobs back to America so we can actually produce real tangible things with real value. He is relying on massive debt in the belief that this is still 1984. Reagan could get away with it to some extant because we still had a productive economy and the dollar was still respected. That is clearly not the case now. If China and the rest of the world refuses to go along with this we will have hyper-inflation. Period. The Republicans will come back with a vengance because under our "two party piece of shit system" they will have nowhere else to go. My fear with Obama was that because of Hillary hatred by the media and bloggers like "BooMan" Obama was never vetted. He should have been. I always feared he would be the next Jimmy Carter. A weak and confused president who would pave the way for the Republicans to get back in power and screw us even worse. Heaven help us if that happens.

Unknown said...

Why wouldn't the banks be glad to "settle" on the toxic assets so they can get them off of their books? Wouldn't it be much like a debt collector settling for less than than "actual" debt just to see *some* money?

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