DeLong’s Geithner Plan FAQ
I meant to say in yesterday’s post on the leaking out details of the administration’s plan for the banking system, that one should actually separate the issues “is this a plan that stands a good chance of working” from “is this a plan that comports with my beliefs about cosmic and social justice.” Geithner’s plan, it seems to me, does a lot better at the first question than at the second. A nationalization plan, I believe, would do better at the second and at least as well at the first. But the first question is an important one, so it is worth emphasizing that there is reason to believe that this can work in terms of pushing the economy toward recovery.
To that end, I think Brad DeLong’s Geithner Plan FAQ is very helpful in terms of putting one’s mind to rest about the efficacy of these measures. He also recommends this article in The Wall Street Journal and this article in The Washington Post as offering more help in understanding what’s going on than was provided in yesterday’s New York Times piece. They got the story first, which has made their coverage the most influential thus far, but it’s not really the clearest most accurate account.
Still, the Geithner Plan, even if all goes well, will leave us with a situation in which essentially the same large firms with essentially the same management still dominate the economy, but now with a bunch of added moral hazard.
61 Responses to “DeLong’s Geithner Plan FAQ”
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March 22nd, 2009 at 10:17 am
Close the italics tag!!!!
March 22nd, 2009 at 10:24 am
This is the most erudite, logical thing that Matt has posted on the financial crisis yet. He should channel more Summers via Delong thoughts.
Secondly, nationalization as advocated by the Swedes would work as well. Nationalization as advocated by Matt would not work. There is a huge difference between those two meanings of the word nationalization.
March 22nd, 2009 at 10:28 am
Yes, indeed! Matt is channeling Summers-the-Thief!
Personally, I’m with Atrios, and all the others. John Cole summarized it well:
The Illness- reckless and irresponsible betting led to huge losses
The Diagnosis- Insufficient gambling.
The Cure- a Trillion dollar stack of chips provided by the house.
The Prognosis- We are so screwed.
Matt the Obama/Summers Courtier-Pundit just isn’t as interesting as he used to be.
March 22nd, 2009 at 10:31 am
Matt always finds a way to defend the powerful against the weak. At the end of the day, it’s really just class solidarity with him and Ezra. I doubt they are even self-aware enough to know that.
March 22nd, 2009 at 10:36 am
FWIW, Robert Waldmann’s response / comment to Delong’s FAQ:
March 22nd, 2009 at 10:40 am
> a good chance of working” from “is this a plan
> that comports with my beliefs about cosmic
> and social justice.” Geithner’s plan, it seems
> to me, does a lot better at the first question
> than at the second.
I assume that by “cosmic justice” you mean (a) not putting the people who created the crisis back in charge (b) not giving the people who created and profited handsomely from the crisis more handsome rewards from the public till (c) conducting honest and detailed investigations into potential criminal and civil fraud leading up to the crisis (d) prosecuting those found to have participated in criminal and/or civil fraud (e) punishing any found guilty (f) generally placing the financial services industry under independent adult supervision by adults with the authority and willingness to spank.
There is a growing consensus among the serious serious people that steps a-e above are undesirable, counterproductive, and generally gauche. Perhaps not surprisingly since the serious serious people are part of the culture and the problem and benefit greatly from the Wall Street – DC culture.
Out here in flyover country where I work in useless occupations such as manufacturing hard goods when my employer fails I lose my job, and get about $6000/year unemployment from the state (until their funds run out which is coming soon). If I were to screw up really badly in my job I would get fired. If I were to screw up so badly as to constitute fraud my employer would call the police and ask them to investigate/prosecute me for said fraud, and they would also sue me for same.
So given that my children and I are now paying the bill for Wall Street’s screw-ups, why EXACTLY should I not expect that the same standard apply to them?
Cranky
March 22nd, 2009 at 10:41 am
By the way, which commenter said on another thread that Matt would quickly come around to this? They’re pretty much correct.
I personally realize that we don’t know exactly what ‘the plan’ is, since this is like the leaking of white papers to read public reaction, but, still, what *seems* to be the general outline looks pretty unsettling to me, a non-expert, and to a few other fairly reliable experts.
Maybe other people who say things like ‘Geithner and Summers and Obama are really smart so what may not look like the right idea probably is.’ I don’t think things work like that — I think most of the time, government proposals which look pretty wrong turn out to be pretty wrong. Then again, I was one of the crazies opposed to the banking & investment deregulation of the 1990s when I was told that those were luddite, Depression-era concerns we were all past.
March 22nd, 2009 at 10:43 am
The lack of a preview function on Yglesias’ blog must be destroyed.
As must the lack of code to detect unclosed bold and italic tags
Cranky
March 22nd, 2009 at 10:45 am
From a political perspective, the cosmic injustice of the plan might be somewhat of a feature from the left perspective. All of this taxpayer money is being spent not merely to prop up these few firms, but to keep afloat the financial sector and asset markets in general.
Which means that that for the rest of my life, anytime I see a rich dude, I’ll know that the government was responsible for either keeping him rich or making it possible for him to become rich.
And I won’t be the only voter who knows that.
March 22nd, 2009 at 11:01 am
Q Why does the plan have the middlemen? Why doesn’t the Treasury just buy the assets itself?
A So they can pretend it’s a free market solution.
Q Why does the Treasury have to pretend that?
A Because pretending we have free markets is what our entire political economy and culture are based on.
Large corporations and government and its somewhat discreet branches are institutions which have parallel goals, and parallel overlapping leaders and parallel methods of operation. The Treasury of the United States has moved from being a parallel financial institution with banks and financial corporations to being a full partner. Individual citizens or groups of citizens or any concept of collective good, an idea that is rejected on a philosophical basis by the institutions, have nothing to do with it
The illusion of separation between the banks and the Federal Reserve was never as strictly maintained. With Greenspan any hint of separation was discarded.
The congress and now the President are now junior partners in the actions of the Fed and Treasury. The Fed and Treasury have relentlessly been grabbing power for 30 years and the crisis represents just another step along the way. The power grab is blatant and there is no possible check on them any longer.
Well there is one. Actually the President could check them, in theory. However nobody elected president would. As is being demonstrated now. Don’t get lost in the why of that. Just take it as fact. You won’t go wrong.
March 22nd, 2009 at 11:02 am
is very helpful in terms of putting one’s mind to rest about the efficacy of these measures.
Strangely enough it didn’t put my mind to rest. DeLong seems delusional. The reason loan volume has dropped is that fewer people are making the stupid loans that got us into this mess. We need to find a way for the economy to function without stupid loans not find a way to resume making stupid loans.
And could you do something so forgetting to fill in your name doesn’t cause your entire comment to be wiped out.
March 22nd, 2009 at 11:11 am
The fundamental issue remains the spread between what the banks value the assets at (60, as per the NYT article) and their market value (30).
If a hedge fund bids at 60, that means it thinks the asset if under-valued by half. If that’s the case, it could sweep up a lot of these assets simply by making bids of, say, 40 right now. (And it would keep all of the upside, and not have to give 80% to the government.)
But if the bids are less than 60, then the bank would have to write down the difference — and we’re right back where we started. They’ll need more capital, and the government is the only viable source for that.
Meanwhile, the Financial Times is reporting that a survey of CDOs issued from 2005 to 2007 have a default rate of 67%, and a liquidation value (on the AAA tranche — the kind that banks would typically hold as reserves) of 32 cents a dollar.
Just don’t see how this works.
Scarier, though, is a proposal to revise accounting rules so that banks don’t have to value these assets as market value, and would basically allow them to set their own values. The banks would then paper over their losses via Enron accounting.
March 22nd, 2009 at 11:12 am
“I personally realize that we don’t know exactly what ‘the plan’ is, since this is like the leaking of white papers to read public reaction, but, still, what *seems* to be the general outline looks pretty unsettling to me, a non-expert, and to a few other fairly reliable experts.”
Why does ‘the plan’ remind me so very much of ‘the plan’ to invade Iraq circa fall 2002?
It’s certainly possible that this will all work, but the likelihood is low.
In reality, just like the Iraq war, this is an attempt to do a major project while concealing the political fallout at the beginning, which will bring dire policy consequences down the road.
—–
“By the way, which commenter said on another thread that Matt would quickly come around to this? They’re pretty much correct.”
One of the nice things about having a trust-fund is that the consequences of policy don’t actually impact your life.
Matt could support the Iraq war plan and the current bank ‘plan’ because he doesn’t face the impact of those plans’ failures.
It wasn’t him being shipped home with a leg amputated from Iraq. It won’t be him facing an inability to maintain a decent standard of living down the road.
Matt approaches policy like it’s a game. (Except of course for stuff like making sure DC has good bike paths. That’s something that actually impacts Matt’s life, unlike Iraq or the bank panic.)
March 22nd, 2009 at 11:13 am
What part of the plan changes the way that anybody does business?
Killing management isn’t merely punitive, it’s also aimed at erasing the practices set up by the incentive program.
Geithner thinks the business model is sound and should continue.
March 22nd, 2009 at 11:13 am
To that end, I think Brad DeLong’s Geithner Plan FAQ is very helpful in terms of putting one’s mind to rest about the efficacy of these measures.
It doesn’t put my mind ot rest; everything depends on what they are buying. It doesn’t look like they are buying mortgages, or credit card receivables or loan receivables – they are buying crappy paper based on the above. The Fed is buying the same type of paper. That means no writedowns for homeowners or anybody else.
This plan looks and sounds like it helps the banks, full stop.
DeLOng keeps arguing for having the Fed (and Treasury) buy the mortgages via these methods. That would be ok, hell, that would be great, but once again, we do not appear to be doing that. I don’t see where this is going to do a damn thing about steadily worsening unemployment or falling production or mass foreclosures. We will load up the balance sheet, and we will likely take lots of losses (real or real and nominal), and we will still be screwed. Because the opportunity costs of doing things to fix the economy will have been spent on saving the banks and accumulating the moral hazards associated with that.
This is the most erudite, logical thing that Matt has posted on the financial crisis yet. He should channel more Summers via Delong thoughts.
Ah, but the problem is, is that in the long-run, Summers is always wrong. And wrong in a way that we pay through the nose for.
Secondly, nationalization as advocated by the Swedes would work as well. Nationalization as advocated by Matt would not work. There is a huge difference between those two meanings of the word nationalization.
Of course we mustn’t, that might work. Yeah, got it. This won’t work either.
max
['1930 is turning out to be a really lousy year.']
March 22nd, 2009 at 11:20 am
Why would Obama care about the cosmic social justice. The incentive is for him to pick the plan with the highest probability of fixing the financial crisis. If this plan had a .01 percent chance of working better than nationalization than he would still be better off choosing it. On something like universal health care, there was time to build public pressure and extract public commitments. On this issue the president could basically do what he wanted. There is no reason to think social justice was a consideration.
March 22nd, 2009 at 11:23 am
I think the plan is an abomination for a whole host of reasons, including but not limited to social justice issues, but on the narrow issue of whether it will “work,” I think people are using a different definitions of the term.
It is likely to “work” in the narrow sense of avoiding the still existent risk of an apocalyptic meltdown in the banking/financial sector, but it will do so at a high cost. In that vein, it likely won’t “work” in the sense of avoiding a prolonged period of low growth ala Japan, given that the dead wood in the banking/financial sector won’t be cleared away.
March 22nd, 2009 at 11:26 am
I’m afraid it will ‘work’ in the sense of repairing a hole in a dam by stuffing it with toilet tissue, and being told not to worry because it’s really nice toilet tissue, the extra plush stuff like Charmin.
March 22nd, 2009 at 11:27 am
Both the mortgage backed securities and the real estate underlying them are both now liabilities. As a strictly logical concept the MBS are assets but as a practical matter they are just liabilities because they are deflating.
The only market for them is now the government. Well there are pockets of vultures buying them and that is a good thing in the sense of the market actually working but the ones doing the buying are the ones who created them at inflated value to begin with.
One can assume the specific MBS they buy will be taken at very good prices working with insiders of the banks who now own them so personal gains can be made at the expense of their institutions. (The RTC operated in this way which was easier since the RTC was the government. Hundreds of billions were made on inside sweet deals with the RTC) At any rate investment, ie lending, for real estate is not going to rise to a level that will cause homes to inflate for a long long time because among other things mortgages are an odd and very crummy investment vehicle and MBS’s are worse. Never mind the real estate itself. That inflates only in relation to the credit that flows into real estate. A now vicious circle as opposed to the virtuous circle that existed during the boom.
An ‘investment’ in existing MBS’s is mal investment which will not add one tiny bit of growth to the economy.
March 22nd, 2009 at 11:29 am
“It is likely to “work” in the narrow sense of avoiding the still existent risk of an apocalyptic meltdown in the banking/financial sector, but it will do so at a high cost. In that vein, it likely won’t “work” in the sense of avoiding a prolonged period of low growth ala Japan, given that the dead wood in the banking/financial sector won’t be cleared away.”
Exactamundo.
The administration has decided to abandon responsibility for the out years.
The size of the mess they are creating won’t become fully apparent to the general public until after 2012, so they are sacrificing American and global prosperity in the out years in order to avoid having to make an only slightly difficult political case today.
March 22nd, 2009 at 11:34 am
“By the way, which commenter said on another thread that Matt would quickly come around to this? They’re pretty much correct.”
Did anyone actually doubt that he would?
The political calculus that leads ambitious hacks like Matt and Ezra to support this is the exact same political calculus that lead them to support the Iraq war in 2003.
March 22nd, 2009 at 11:39 am
Delong’s Faq stops being helpful by Point 2, which is answered not in the tones of an economist, but in the tones of a used car salesman trying to sell a lemon:
“Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn’t make back its money?
A: Then we have worse things to worry about than government losses on TARP-program money–for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.”
Notice that the question is deliberately badly made. A better question would be: look at the recent map of unemployment made by the NYT. Notice that it gets worse in just those areas where housing was most expensive, and is falling fastest. Plus, even on the most conservative estimates, unemployment is going further up this year. Now consider that the housing bubble consisted precisely in the fact that housing prices, which usually are pegged at a ratio of about twice the household’s yearly income, went up in Southern California to 10:1. So, isn’t the government actually continuing to believe, against the evidence, that housing always goes up? Isn’t this the bubble mentality in action?
Notice, now, the answer to the second FAQ. Is it an answer that tells us something about the mortgage-backed assets? Are these assets all simply “mortgage backed”, or are they sliced and diced to contain bad mortgages and other loans of various types? Are there triggers in the mortgage backed securities that will devalue them – so that, say, counterparties have to be paid off if those triggers are hit? No answer at all to this question. Instead, the questions is – amazingly – dismissed as a joke. As though only a freak would want to know what was in the stuff that the U.S. was, you know, in reality buying.
This is not a serious defense of the Geithner plan. It is a joke. And it is a pernicious joke, since it assumes that the economy will soon get back to “normal” – precisely Krugman’s criticism of the plan.
So, not only does it reward the rich at a terrifying rate, but there’s absolutely no reason to suppose it will work. Or rather, terrifyingly enough, it employs the same logic that was employed by AIG when it sold the CDS. After all, things never get bad – otherwise, ha ha, better get out your survivalist gear! How insane, how stupid, how criminal, how utterly against “change we can believe in” is that?
March 22nd, 2009 at 11:43 am
“Still, the Geithner Plan, even if all goes well, will leave us with a situation in which essentially the same large firms with essentially the same management still dominate the economy,”
Isn’t that the primary objective?
March 22nd, 2009 at 11:44 am
Here’s what I posted yesterday:
“Don’t worry, Matt will get on board ( the Geithner plan). Remember TARP? Matt shit all over BushCo/Paulson for giving away the farm to the banksters until his heroes, Pelosi, Reid, Frank, and Obama started pushing for its passage. Then he changed his tune and pissed all over anybody who voted against it. Same MO here – count on it. Its like his support of the Iraq invasion back in 2003. He supported it because some of his “progressive” heroes did. Matt’s an echo chamber for his heroes, just like the idiot Jesus freaks down in Alabama are for the GOPer morons.”
As the spring follows the winter, Matt’s right on schedule.
March 22nd, 2009 at 11:45 am
It is funny to see all the impotent rage against MY of all people. Everyone is a financial expert nowadays it seems.
March 22nd, 2009 at 11:46 am
Oops. I should have said, “Now consider that the housing bubble consisted precisely in the fact that housing prices, which usually are pegged at a ratio of about twice [no, 3 times] the household’s yearly income, went up for example in Southern California to 10:1.” In Michael Lewis’s excellent The End of Wall Street, this is the killer graf:
“At the end of 2004, Eisman, Moses, and Daniel shared a sense that unhealthy things were going on in the U.S. housing market: Lots of firms were lending money to people who shouldn’t have been borrowing it. They thought Alan Greenspan’s decision after the internet bust to lower interest rates to 1 percent was a travesty that would lead to some terrible day of reckoning. Neither of these insights was entirely original. Ivy Zelman, at the time the housing-market analyst at Credit Suisse, had seen the bubble forming very early on. There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators.” Zelman alienated clients with her pessimism, but she couldn’t pretend everything was good. “It wasn’t that hard in hindsight to see it,” she says. “It was very hard to know when it would stop.” Zelman spoke occasionally with Eisman and always left these conversations feeling better about her views and worse about the world. “You needed the occasional assurance that you weren’t nuts,” she says. She wasn’t nuts. The world was.”
Delong either doesn’t know what he is talking about, or he is part of the Summers/Geithner mindset that supposes that the old order – circa 2006 – is coming back. In either case, the FAQ is unbelievable.
March 22nd, 2009 at 11:53 am
Prof. DeLong seems like a smart man. For a moment I felt better. However his commenters are running circles around his argument, and he hasn’t engaged any of their questions. So I still think we are screwed.
March 22nd, 2009 at 11:55 am
From the WSJ article:
Seems like a key problem. The first germ of it was when Paulson forced/encouraged healthy banks to take TARP money as well, to create some deliberate ambiguity about which banks were the weakest. Then Dems in Congress seemed to forget that in their populist zeal. If the 90% tax on bonuses applies to the healthier banks retroactively, what private sector investors would want to open themselves up to that sort of post hoc caprice?
March 22nd, 2009 at 11:58 am
Not actually knowing anything about any of this stuff, I’m hesitant to take a position, but a few thoughts.
The first thing is that from what I get about the economy, I don’t think Matt’s point 2 is even slightly relevant. If the Geithner plan actually works, I don’t really care about the “social justice” issues – anyone who thinks that this crisis is going to result in some great purge of the assholes who caused this thing is deluding themselves.
The real question is whether the Geithner Plan will actually work. De Long’s FAQ does a decent job explaining the assumptions behind the plan, but I don’t think it does much more than that – it certainly doesn’t address any counterarguments. It’s good to see someone actually trying to explain what the plan is supposed to do, and how it’s supposed to work, but it doesn’t do all that much to convince me that it will work (I’m not convinced by the arguments that it won’t work, either, though – or that nationalization will necessarily do a better job. I hold to agnosticism on all these questions.)
That being said, do we know that this is actually the plan? Could this be a trial balloon of some kind?
March 22nd, 2009 at 12:02 pm
There’s a possibility that Delong is angling for a Treasury job: if so, he’d have reasons to avoid open criticism of Administration policy, no matter how absurd.
March 22nd, 2009 at 12:07 pm
Delong had a Treasury job under Clinton and is a past associate and coauthor of Summers. If he wanted a Treasury job I expect he would have had one already, unless he’s not been paying his taxes. A couple of years ago he joked on his blog that he’s got a couple of kids nearing college age so he needed to get busy with outside speaking etc to make some money — given that I don’t think a Treasury job would look that inviting to him.
March 22nd, 2009 at 12:12 pm
I assume that this information is being leaked precisely to gauge the reaction. But trial balloons aren’t disconnected from the desired policy. They’re not likely to release a plan that’s totally the opposite of what they desire — if there’s an administration response to the public reaction, it’s likely to address the most objected-to elements with some attempted technical fixes or cleverer language to pretend that some objectionable element isn’t really significant.
March 22nd, 2009 at 12:13 pm
The FAQ is an exemplary rhetorical structure – exemplary of mainstream economics. It is dense. Detailed. It seems to explain the Geithner plan. It makes the reader feel smarter. And it is based on a false premise, the questioning of which is waved away as though it were some irritating detail that only a cranky skeptic could doubt.
This is the pitch that will reach young urbans like MY – appealing to their sense of themselves as meritocrats. Identifying with the “engineers” that will get us out of this mess. Sighing that life isn’t fair, but sometimes you got to do what you got to do. Oblivious to the fact that the whole plan is based on wildly false assumptions.
This is how disasters grow in size, from small to large to larger. Meanwhile, one swallows whole fleets of camels – like the utter debauching of the FDIC, which is going to be the sacrifice to the Gods of Citi. It is incredible that any liberal – or even any educated conservative – would consider this a good plan.
March 22nd, 2009 at 12:17 pm
The key assumption is that a Mad Max world follows if our current financial giant institutions fail. Which gets to the accusations about MY’s attachments to the elites.
A world without such gigantic and centralized banks and financial institutions would make for a far different country and world. By definition a more distributed system would mean a more widespread distribution of power and wealth, pick your order for those two.
Would it be a Mad Max world? It would not have to be but let me suggest that giving up one tiny bit of power is seen by the holders of it as an existential threat. It would be in their interests therefor to foment a Mad Max world so that popular sentiment will urge the elites to restore order.
One can think of dozens of ways the economy could arrange itself that was more efficient and just but DeLong doesn’t even bother with that. Instead he issues a primal scream warning of dark things if this hare brained plan is not adopted.
March 22nd, 2009 at 12:20 pm
Brad DeLong clung to the “No one could have predicted this. The mathematical models used were correct. The fundamentals remain strong” line long after it was absolutely obvious that it was total bullsh*t. I don’t trust him at all.
March 22nd, 2009 at 12:20 pm
Perhaps you should also be asking the question “does this plan put us in another great recession/depression as soon as this one ends because the same people are in place in the same institutions with even more incentives to take the same actions they did before?” Moral/ethical issues aside, which most of us do consider important, but could arguably be subjective, the question of whether this plan might work to fix the economy is only relevant if, immediately after the fix “works” we don’t end up in the soup again as bad as we are now.
You acknowledge this problem in your last paragraph, but you don’t seem to admit that this probability nullifies any practical benefit from the plan we might have in the short term.
March 22nd, 2009 at 12:24 pm
back to the Yves and Paul show
http://krugman.blogs.nytimes.com/2009/03/22/brad-delongs-defense-of-geithner/
http://www.nakedcapitalism.com/2009/03/investor-on-private-public-partnership.html
March 22nd, 2009 at 12:46 pm
Deference to the experts is nowhere as universal as with matters financial. Money is sacred and understood only by its high priests is one implicit conclusion that can be reached about this deference.
Half of all comments on forums such as this preface with testimony about the commentators ignorance. Ignorance of financial and monetary matters has long been a point of honor among liberals and progressives. A great tragedy.
Out of the gate the bank bailout regime was opposed by the GOP leaders and then their chorus. If the motives were as pure as new snow or base self interest doesn’t detract from the fact that out here in the wilderness now, in middle class flyover America, suddenly there is a genuine populist consensus quickly forming against monied elites.
There are all sorts of ways this might develop but don’t immediately hold your nose and turn away from erstwhile conservatives railing against the Democratic congress or the Treasury or Obama on these matters. The tragedy is going to come if the political elites do not divorce themselves from Wall Street, used for want of a better term. Their plans will not work well. They will work if at all only in a limited sense.
The great Democratic failure has been the parties abandonment of economic populism. If the GOP is allowed to grab that reign it will be a disaster. Well that is my theory because I believe a GOP populism will devolve into authoritarianism.
March 22nd, 2009 at 2:04 pm
Well, interesting how the fundamental premise of mainstream economics, about the markets encoding information, gets tossed out the window when markets go bad. Now we suddenly don’t know “the expected performance of the assets.” Well, gee, why don’t we go to the market price of them. Oh yeah, suddenly, the market is having an information cold. And what Citi says is worth 100 million, the market says is worth 30 million.
It makes one want to die laughing. Freshwater economics, and Neo-Keynesian “we know more math and agree with the freshwater economists but are democrats” have been shown up for what they are fundamentally – frauds. Frauds that promised to “control” the business cycle, and got so intoxicated with their own rhetoric they believed it. Now the same frauds are going to try to control the hurt to the wealthiest, since, although Dems decry it, the whole spectrum really believes in trickle down. Sorry, it was always a fairy tale, and wealth always has to be produced at the grassroots level and trickle up.
I think Geithner’s plan could be radically simplified, and at the same time combined with a sorta New Age-y Aztec aspect. Instead of pyramids of sacrifice, just have Americans bring one thousand dollars apiece and lay it on the doorstep of – your nearest Citi branch. I’m sure this will cure that nasty unemployment pronto! Plus we could ritualize it, people could wear masks, we could make it a holiday – The Best and Brightest Day – when we sacrifice so that we get the good crops later on.
March 22nd, 2009 at 2:31 pm
if you have a lower cost of capital than the other market participants, it might well make sense for you to buy an asset at a premium to the market price.
Didn’t AIG make a run with this sort of thinking as it leveraged its AAA rating?
March 22nd, 2009 at 2:38 pm
It is like Angry Bear’s Robert Feldman said, the word “market” is like the word tinkerbell. It appears, it disappears. It has nothing but an ideological value. There’s no market, eh? Well, usually if a business has no market, what that means in simple Engish is that it is selling stuff that stinks. Then it goes bankrupt. Then it sells stuff at fire sale prices. Because that is what the “market” does. Except when it is a peekaboo concept – gee, there was a market here just last year.
There is a market. The judgment of the market is that the losses on those assets are too big to recover. Put the assets in a real institutionally existent marketplace, crush the OTC system, loan no money to the dealers, force all trades in these securities in the U.S. to be made on that market, let the losses accrue to the losers. They made a lot of money, and then it turned out the stuff they were selling was shit, so they will lose all that money. When that happens, it is called bankruptcy. Nothing special here. Put the banks in receivership. We know what happened to Indymac – the “no market” marked down the securities by eighty percent. What you are really saying, DMT, is that the market will treat the rich people badly.
The hilarious thing about economics is that it is hardnosed when it comes to construction workers – and then gets soft and dewy eyed when it comes to bankers.
March 22nd, 2009 at 2:50 pm
The more I think about it, the more your remark about Markets makes me chuckle, DTM. It is like claiming that temperature only exists between 78 degrees fahrenheit and 85 degrees. The rest of it, being obviously uncomfortable, isn’t temperature. And zero degrees is zero, so it can’t be temperature!
Magic thinking. That is what the cult of financial capitalism has come down to.
March 22nd, 2009 at 3:17 pm
Which, of course, is why I want a market in these securities – I don’t want a pseudomarket. The pseudomarket is a vast and slow failure, that will bleed our ability to address the real issues in the economy, which are not about bad bets by the casino banks.
There are plenty of ways to get money into circulation. We keep hearing there is no political will for it – well, the appetite comes in the eating. Let the banks fail, put them in recceivership, and there will be a huge appetite for finding a modality to put money into circulation. I think I know where that leads to…
March 22nd, 2009 at 3:22 pm
As I said yesterday, this is also a good read on Bernake’s response.
http://ashtonadvisory.blogspot.com/2009/03/this-dear-dear-land-is-now-leased-out.html
Moreover, I can tell you that some very influential people (in the center of this crisis) are taking notice of that blog.
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March 22nd, 2009 at 5:11 pm
DTM,
What do arbitrageurs have to do with creating an efficient market? You don’t seem to know what arbitrage means, or what makes a market efficient. You also don’t seem to understand the real reasons why there is no market for these securities.
March 22nd, 2009 at 6:05 pm
DTM, my point was precisely what I wrote, didn’t AIG have a go at leveraging its AAA rating to profit from reducing the cost of capital for all sorts of market participants, especially banks that could, by holding assets insured by an AAA entity, reduce their required capital balances? I expect the AAA-Treasury spread will be positive nearly always, but I don’t think that has anything to do with it.
Steve, arbitrageurs are very useful for making markets more efficient by trying to profit from apparent price discrepancies. This is so fundamental that even I am aware of it.
March 22nd, 2009 at 7:28 pm
Actually, DTM, you sound just like the devil that whispered to Clinton in 1992. In fact, there will be zip liberal policy if we sink a trillion dollars into a losing proposition, and one, moreover, that only benefits the wealthy. The argument that it benefits all of us is insane, and will be believed only by cargo cultists of the neo-liberal era.
A “working” bank system needs: a, to clean up and bury the zombie banks: b., to find a better way to inject money into the real economy, which could easily be done through a number of tax funded bank initiatives – just make it possible for any taxpayer to become a member of a Federal employees credit union, for instance, allow them to borrow at some reasonable price, take in the dirty washing from the bottom. C. Anybody who looks at the map of unemployment and the map of toxic mortgages knows that the Paulsen-Geithner program is premised on an impossibility – which has the same logic as the bubble. That logic – that housing prices always go up – is now being recycled. How dumb is that. Yeah, a population that is probably nearing 14 pecent unemployment in real terms is gong to go out and bid for houses at 2007 prices. You can’t come up with a dumber plan. To commit a trillion dollars to a proposition that may come true over ten years wipes away any chance for health care reform, because – you’ve spent a trillion dollars! I one month.
You want health care reform, you do not want the FDIC loaning out 800 billion dollars on being the greater fool.
There’s only one solution and there has been only one solution since the beginning of this crisis: the government will have to take a much greater share in our economic structure for the foreseeable future. I think that, as the banks keep going down – and this plan will only make the process sloppier and much, much more corrupt – that solution will, in fact, be the one we come to. That’s reality, not faith-healing via this odious plan.
The good thing is, with AIG burning in people’s consciousness, a plan that rewards the wealthy on this scale is going to cause a major populist outbreak. I can’t foresee Congress standing idly by while Geithner corrupts the FDIC – we will see what is politicallly feasible. The cool thing about blogs is that commenters such as myself can spread the word about this wildly bogus theft – and this can break through the media’s see no evil posture. All of which would be made easier if there was a sane opposition party. Opposition has to be created within the Democratic party. I think there are definitely people who will do that.
Let’s hope that opposition to this catches fire. It will definitely be sweet to see this become, quickly, politically untenable.
March 22nd, 2009 at 7:50 pm
Atrios’s idea might work too – using government money in connection with banks, regional players, that are financially intact. Government sponsored accounts offering people the same interest that the Fed offers Citi, or a little higher, with some appropriate limit on credit lines – ten to twenty thousand. Much much cooler than throwing a trillion into the abyss.
i do hope progressives don’t play your game, DTM, and start relating this fraud to “getting a health care” plan. It reproduces Daschle’s swansong in 2002 – voting to give the president the power to invade Iraq was trivial – now it is time to save social security. It was a bust then, it will be a bust now. I will be so bored if MY takes this point of view.
March 22nd, 2009 at 9:08 pm
Tiny Tim Geithner and Helicopter Ben Bernanke are going to ruin this country. They both need to GO!
http://fargoneworld.blogspot.com
March 22nd, 2009 at 9:18 pm
well Steve Delancey I need to get paid
By Any Means Necessary
Baby has already spent that bonus money
March 22nd, 2009 at 10:13 pm
from Mark Thoma
http://economistsview.typepad.com/economistsview/2009/03/government-intervention-in-the-market-for-toxic-cars.html
March 22nd, 2009 at 10:16 pm
“Steve, arbitrageurs are very useful for making markets more efficient by trying to profit from apparent price discrepancies. This is so fundamental that even I am aware of it.”
You don’t seem to understand what arbitrage is either. Price discrepancies occur when the same thing has two different prices at the same time for no reason. For example, when a share of XYZ trades for a penny more on the San Francisco stock exchange than on the NY stock exchange at the same time. An arbitrageur might be able to make money on that spread, and, in the process, narrow such price discrepancies. That has absolutely nothing to do with the price discovery process of an efficient market. When two different investors bid different prices for XYZ on the same stock exchange, that’s not arbitrage, that’s a market in action.
Further, the problem with the illiquid mortgage-backed securities isn’t that there are no transactions — there have been a few. There is a market for these securities, though it’s an illiquid one with no demand at the banks’ marks. The problem is that if the banks sell these assets for their real, current market value, they will have to take write-downs which may make them technically insolvent. Overpaying for those assets just sticks the tax payer with the losses.
March 22nd, 2009 at 10:38 pm
I’m a little confused about one thing. Isn’t the Fed already directly buying a trillion dollars of MBS, via quantitative easing? What are they paying for it? And doesn’t that already get a huge proportion of toxic assets off the bank books?
Or is the Fed thing completely different?
March 22nd, 2009 at 11:46 pm
That depends on the interest rate you charge: if it is high enough to compensate you for the risk you are taking, there is no subsidy.
Everything I’ve seen so far talks about a ‘low’ interest rate. Which to me means ‘below market’ interest rate. Which means, ipso facto, below the rate which compensates the lender for the risk.
March 23rd, 2009 at 12:17 am
AIG didn’t simply transparently borrow using its AAA rating then use those funds to purchase assets on a leveraged basis.
That’s right, good thing I didn’t suggest they did. There are many ways to use a big swingin’ AAA rating and the associated access to cheaper capital and other top dollar treatments. But surely you are not suggesting that AIG (or GE) did not borrow money in a AAA way and use that money to do other things (although I’d bet deliberately overpaying for dicey assets is not one of them).
March 23rd, 2009 at 1:15 am
Steve Delancey #59, you wrote: “An arbitrageur might be able to make money on that spread, and, in the process, narrow such price discrepancies.”
Narrowing price discrepancies, in other words helping markets converge on a true price reflecting fundamental cash flows, is making markets more efficient. Do you disagree?
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