March 24, 2009
The Geithner Plan
Posted by Gordon Smith

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:

Rather than defending the large subsidy the plan creates for anyone who buys troubled assets, administration officials tout the virtues of markets in general, and say, hey, this creates a market, so it must be good.

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:

This kind of complex market-based scheme makes scams easy. After less than 24 hours, the Internet already abounds with detailed and plausible proposals regarding how to take unreasonable advantage of the plan, either if you are an independent hedge fund buying toxic assets or the employee of a bank selling the same or – ideally – someone with connections to both.

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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