As I perused Daily Kos today, I found a diary on the Rec List exclaiming that Geithner's Policies May Be Working Already! Yes, just ask all the unemployed.
When did we become a faith based community? Was it the primary? Is it because Barack Obama is so cool? Because it is so hard to think critically? Were we deluded when we called ourselves "reality-based"?
Let's see: Iraq doesn't matter anymore. We'll keep troops there until December 30, 2011, but that's cool here. FISA is forgotten. And now we pretend that bailing out investors with a trillion dollars of tax payer money is just fine. In fact, it may be working already!!
And Gold may be falling out of the skies.
More, after the fold.
Real debate is useful. There is a real debate to be had over whether the Obama/Geithner Plan to use a trillion dollars to buy assets from banks that are worth far less than what banks paid for it is the right way to go:
WASHINGTON - The Obama administration’s latest attempt to tackle the banking crisis and get loans flowing to families and businesses rely on a new government entity, the Public Investment Corp. to help purchase as much as $1 trillion in toxic assets on banks’ books.
The plan that Treasury Secretary Timothy Geithner intends to announce Monday aims to use the resources of the $700 billion bank bailout fund, the Federal Reserve and the Federal Deposit Insurance Corp.
The initiative will seek to entice private investors, including big hedge funds, to participate by offering billions of dollars in low-interest loans to finance the purchases and also sharing risks if the assets fall further in value.
Treasury’s toxic asset plan could cost $1 trillion
WTF is a "toxic asset"? We allow language to obscure. It is an asset worth less than what the bank paid for it. If the bond cost $1000, the asset is worth less. $500? $100? No one knows, but they all know it is a lot less.
Now the government is going to create a market for these bonds that we know are worth far less than what banks paid for it. And we are going to overpay the banks for it, which will help bank shareholders.
I agree with economists like Paul Krugman on this:
Why was I so quick to condemn the Geithner plan? Because it’s not new; it’s just another version of an idea that keeps coming up and keeps being refuted. It’s basically a thinly disguised version of the same plan Henry Paulson announced way back in September. To understand the issue, let me offer some background.
snip
But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets. Actually, that’s not quite it: the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls "a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for [I don't think I can finish this on a Times blog]"
Why am I so vehement about this? Because I’m afraid that this will be the administration’s only shot — that if the first bank plan is an abject failure, it won’t have the political capital for a second. So it’s just horrifying that Obama — and yes, the buck stops there — has decided to base his financial plan on the fantasy that a bit of financial hocus-pocus will turn the clock back to 2006.
Paul Krugman: More on the bank plan
Some economists disagree:
Q: What is the Geithner Plan?
A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit.
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.
Brad Delong: The Geithner Plan FAQ
Krugman responds:
Brad treats the prospect that assets purchased by public-private partnership will fall enough in value to wipe out the equity as unlikely. But it isn’t: the whole point about toxic waste is that nobody knows what it’s worth, so it’s highly likely that it will turn out to be worth 15 percent less than the purchase price. You might say that we know that the stuff is undervalued; actually, I don’t think we know that. And anyway, the whole point of the program is to push prices up to the point where we don’t know that it’s undervalued.
So default on those non-recourse loans is a substantial possibility, which means that there is a large implicit subsidy involved. That’s why Christie Romer’s claim that we’re relying on the "expertise of the market" rings so hollow: we’re giving investors a big subsidy, so this has nothing to do with letting markets work.
Paul Krugman: Brad DeLong’s defense of Geithner
It's complicated stuff. A lot easier to just base it on believing in Barack Obama. A lot easier to "whistle through the graveyard" and pretend it already is getting better. So Geithner was right (because he is Barack Obama in people's minds now) last fall and Paulson was right and the Bush plans were right, because most of Obama's plans have not even affected the economy to any large degree yet.
We can make believe that Geithner's plans may be working already. Yes, AIG has worked out so well. Since September millions have jobs have been lost. Perhaps we staved off a Great Depression, but even that is not sure yet.
Meanwhile, more jobs disappear and more homes are foreclosed on every day.
There are going to be very hard times and we never are going back to the Roaring 90s and 00s. President Obama seems to understand that when he speaks of an end to bubble economies.
President Obama may be right or wrong about this policy choice, but I will not pretend things are getting better already. I call bullshit on that proposition. Better compared to what?
It may be raining gold already because of Geithner's cool policies but I'm going outside to look and see if it hits me in the head. Reality matters. Empirical testing of statements matters.