As I draft this post, I am listening to President Obama's news conference. Is it my imagination or does he speak more haltingly about financial issues than he does about other issues? That would be understandable because markets around the world are watching closely.
Earlier today, I spoke at a Federalist Society event with my friend Christian Johnson from the University of Utah. My focus was Treasury Secretary Geithner's Public Private Partnership Investment Program. Here are some quick observations ...
First, "legacy assets"? Well, they couldn't very well keep calling them "toxic" when they are asking people to buy them.
Second, Paul Krugman has raised all sorts of problems by criticizing the Program (for a nice debate involving Krugman, Simon Johnson, Brad DeLong, and Mark Thoma, see here), but his main point is pretty simple: no matter what the Obama Administration says, the Geithner Plan is a subsidy to banks and private equity investors (Krugman: "administration officials keep saying that there’s no subsidy involved, that investors would share in the downside. That’s just wrong."). Krugman is right about the subsidy, though that fact alone doesn't make the plan is a bad idea.
Third, one of the most interesting aspects of the public debate is the Obama Administration's pro-market rhetoric about the plan. For example, Treasury's "Fact Sheet" about the plan says, "to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program." Does this rhetoric reflect a commitment to the same regulatory approach used by the Bush Administration? Krugman again:
It’s a bit disappointing to see the Obama administration engaging in this sort of market-worship — hailing markets as a Good Thing in themselves, rather than as an often but not always useful means to an end. But I have reason to think that unlike the Bushies, they don’t really believe it; it’s just politics. Which is actually better than having genuine market fanatics running things, I guess.
That last paragraph is fascinating. The Obama Adminstration wants us to believe that this Program is all about making the markets function again, but the subsidy is a much higher risk proposition politically. And that leads to my last point ...
Fourth, did you notice the editorial by Timothy Geithner in yesterday's W$J? It was entitled "My Plan for Bad Bank Assets." My Plan. Not the Obama Administration's plan. In fairness, he should have called it "The Bebchuk Plan." In any event, Geithner has tripped repeatedly during his tenure as Treasury Secretary, and if the Program fails, we will all know who to blame. Why would it fail? Simon Johnson:
If you think the kerfuffle over AIG bonuses is worth protesting, just imagine how many companions you will have if private investors and banks make out like bandits under the Program, but we remain mired in a recession. Or worse. My guess is that the Obama Administration is positioning itself for that possibility, supporting the plan with a full-court media press, but making sure we all know this is Geithner's idea.
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1. Posted by Milton Recht on March 24, 2009 @ 23:08 | Permalink
Based on the plan's eligibilty requirements for the private investors, there will be many who also own stock in the banks that are selling their 'legacy assets'.
Over bidding will increase the buyers' return on their bank equity and other debt holdings and decrease the reported return on the legacy assets.
It will substantiate the administration's accepted political theory that the assets were undervalued and hide the excess profits in the bank's stock appreciation.
The total return to the buyers will be the same as if they bid the assets without considering an increase in their equity holdings, but it will escape government reports about the program and media attention.
2. Posted by Mike Guttentag on March 25, 2009 @ 16:52 | Permalink
Gordon. As always, I think all of your observations are spot on. I think “legacy assets” is a decent effort to get rid of the “toxic asset” phrasing, though certainly doomed.
I am, however, I think more than you, a fan of the plan. True, it is a subsidy in just the same ways as Paulson’s plans were a subsidy. But if you are going to make a subsidy, why not try to do so as efficiently as possible? The Geitner/Bebchuck approach simply tries to use market mechanisms to minimize costs: nothing especially ideological about that.
To me this approach seems very Obamaesque. If you are going to try and achieve a goal, why not try and achieve it in the smartest, most efficient way possible. Can that work? After the Bush/Paulson “keep it simple” approach, I’m willing to give it a try.
3. Posted by Jake on March 25, 2009 @ 18:57 | Permalink
Gordon, your comments are insightful. But you err in asserting that the flagrant subsidy to the banks and hedge funds, without more, does not make the Geithner Plan "a bad idea." Apart from whether the distributive consequences of further subsidizing the banks and hedge funds makes any economic policy sense (and it does not in my view), this massive Leninist intervention by our Federal government in the private financial markets will obliterate the liberty the Framers of our republic thought they had guaranteed for all time.
4. Posted by Gordon Smith on March 25, 2009 @ 23:52 | Permalink
Mike, I am cautiously optimistic about the plan. I endorsed the Bebchuk proposal (see the link in the post), and I think this could work, but it's not without substantial risk.
Jake, The Geithner Plan discussed in this post doesn't provoke that sort of reaction from me, but I am a lot more worried about his forthcoming request for new powers. I need to think some more about this, but it appears that the Obama Administration is heading toward a systemic risk regulator.
5. Posted by Lawrence Cunningham on March 26, 2009 @ 8:46 | Permalink
Gordon,
Great post. One quibble re title of Geithner's WSJ op-ed. You note it was called "My Plan" and say he might have called it Obama's or Bebchuk's Plan. But, usually authors of op ed pieces have no say in the title, something the editors control without an author even knowing what it is until publication.
6. Posted by Mike Guttentag on March 28, 2009 @ 15:23 | Permalink
Joe Nocera joined the Bebchuck/Smith/Guttentag bandwagon in today’s New York Times.
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