March 25, 2009

Really, this is it?

Yeah, I watched some of the hearings yesterday. I wasn't terribly impressed and didn't even find it very funny, except for Michelle Bachmann quizzing Geithner and Bernanke on the constitutionality of their actions (I guess she was absent the day they discussed the commerce clause in law school). But other than that, I'm pretty much at a loss.

First off, this is Paulson's original TARP plan, but doing now doesn't make as much sense to me. For one thing, the Fed has the ability through already created mechanisms to help industry digest these assets. For another, the gap between what the market is offering on these assets and what the banks need them to be worth to maintain solvency is VERY large. Given that, why wouldn't the banks temporarily offload some of their assets to the Fed in intermediate term repo's and then use the money to grow fully marketable assets, shaving off a few points per transaction until the holes in the balance sheets can be filled?

The funniest thing about this is the defense of it and how it's fair. Austan Goolsbee, who is about half an economist at best, takes on Krugman regarding his criticism of the plan. To say it's an epic fail for Goolsbee you have to ignore his takedown by Tanta a few years ago. In the scheme of things, this is really just another foot-in-mouth fuckup for him, kinda like the one Larry Summers had, also with Krugman.

What positives are out there seem to be of the 'well, it's what we've got' variety. I think that's bullshit since, in the end, it probably will work. And yes, some already rich folks will get a lot richer. What I'm curious about is what happens to the institutions that are forced to sell some of these assets below their carry value? When those big holes in their balance sheets become realized losses, what happens then? Do we buy still more stock in those companies to shore them up or do we go ahead and, you know, nationalize and wipe out the equity holders?

I said earlier that this was basically Paulson's original idea for TARP. What bound him up was the inability to value the assets which are currently worth far more than the market will pay because of irrational fear and some quite legitimate uncertainty. Pay too much and it's crony capitalism and a waste of taxpayer funds, too little and you leave the problem unfixed. Geithner's plan gets around these issues neatly by subsidizing (and that's what this IS, boys and girls) private investors to perform price discovery (with government money) and to create a market where the assets can trade (made liquid with government money).

It also busts, like a pinata hit with a stick, the idea that the market has money, it's just nervous. The fact is these investors are somewhat cautiously in the market now, picking up things on the cheap. They're willing to pay more than they are now IF they get cheap government money that doesn't need to be repaid if they default.

Which leads me to believe this plan is bullshit, the price discovery will be in a vacuum and in the end you'll end up nationalizing the banks anyway. What we need is a solid valuation model and then government can buy the assets to hold. My way saves taxpayers money... Geithner's way makes a lot of rich people, richer, with our money and we risk losing a lot.

Oh, both plans will work. My way just socializes the risk and the reward. Geithner's socializes the risk completely and only partially socializes the reward.

Posted by mcblogger at March 25, 2009 01:16 PM

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