The Campaign Spot

The Markets Love Geithner’s Plan — But What Does It Mean for Taxpayers?

Credit where it’s due: So far, the markets love the toxic-asset plan unveiled by Tim Geithner today, with the Dow Jones Industrial Average up 260 points.

(For perspective, now the Dow is at 7543 or so; on Inauguration Day 2009, the DJIA closed at 7,949.09. On Election Day 2008, the Dow Jones Industrial Average closed at 9,625.)

Of course, the markets probably ought to love a plan that is win-win for them. Geithner has set up a system where the government finances hedge funds’ and private equity firms’ purchases of the toxic assets, perhaps spending as much as $1 trillion. And firms participating in this public-private plan will not be subject to the compensation and bonus limits that were enacted for those participating under TARP.

Under the Paulson plan that I was a tentative supporter of, the government was supposed to buy these toxic assets. Under this plan, the government loans private traders 95 percent of the money to make the purchase. If the assets turn out to be more valuable, the firm makes a profit. If they don’t, the taxpayer’s left holding the bag.

Paul Krugman seems to loathe the plan:

The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.
And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.
But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

Doesn’t this sound like additional socializing of risk and privatizing of profit?

UPDATE: A reader asserts, “The Dow skyrocketed right after TARP passed. How did that work out for them?”

Actually, that’s not quite true. It was the days after TARP passed that the Dow dropped below 10,000.

Exit mobile version