Yesterday’s stock-market jump doesn’t sell me on Timothy Geithner or the latest version of his bailout plan. Obviously, some investors are psyched about the opportunity to invest in these assets, have most of their losses covered by the taxpayers, and then benefit on the upside. Big surprise. As John Berlau of the Competitive Enterprise Institute explained yesterday, fresh injections of taxpayer money without a substantial rethinking of wrongheaded mark-to-market regulations will be worse than useless.
(Memo to clueless policy wonks: prices are not the same thing as value. If people refuse to sell an asset at a given bid price, that means they think it’s worth more than that — as a residence rather than an investment, for example, in the case of home prices. Their valuation is no less “accurate” than the competing valuation of a potential buyer, particularly because the buyer and the seller may have entire different time horizons.)
Meanwhile, the Cato Institute’s Jagadeesh Gokhale explains the issue well in a new background paper on the financial crisis. The nut graf:
[T]he bailout is poorly designed and its implementation appears panicky — marked by a knee-jerk trial-and-error process that may have heightened market uncertainty. Worse, current interventions in market processes and institutions could become permanent, to the probable detriment of the nation’s long-term economic prospects. With or without the bailout, the ongoing recession is likely to be deep and long.
As for Geithner himself, can you imagine a less-elegant way to describe the plan: “I’m very confident this scheme dominates all the alternatives.” Sounds like a clumsy translation from the original French.