Geithner reveals plan for toxic assets … to the tune of $1 trillion

Posted on March 23, 2009

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In an op-ed in the Wall Street Journal, Treasury Secretary Timothy Geithner fleshed out more details of his proposal to absorb toxic assets on the balance sheets of major banks. Dubbed the Public-Private Investment Program, the plan calls for the government (i.e. the taxpayer) to buy bad real-estate loans and securities from banks and calls for private investors to buy those items back from the government. The size will initially be $500 billion and eventually balloon to $1 trillion.

On the surface, it sounds like Geithner found a perfect harmony between free-market and statist solutions. I mean, just look at the name! “Public-Private,” can’t get much more balanced than that! Unfortunately, once you think about it a tad longer, you begin to realize it might not be the great solution to the problem. Essentially, the government will be buying these bad assets at face value while investors will then compete to buy them at a lower price. Exactly how this will translate into profit for the taxpayer escapes me. Economist Mish Shedlock offers a host of arguments against the plan, along with the concerns of others, culminating in the realization that the plan seems to be a giant “confidence” game in which Treasury tries to persuade private investors that the bad assets are worth more than they truly are.

Michelle Malkin calls it the David Copperfield School of Economic Recovery, and Russ at A Time to Choose says Treasury is merely crossing its fingers. But in the larger picture, think about what the $1 trillion plan means against the backdrop of a $700 billion TARP program (voted for by then-Senator Obama, along with John McCain) and the $787 billion stimulus. Essentially, the plan is an admission that the two bloated proposals, touted as absolutely necessary to remedy our economic problem, failed to fix the problem in any sense, which fundamentally leaves me with little confidence that throwing yet more money down the drain will prove anything but mostly futile.

Thankfully, the stock market today jumped 500 points, based on the fact that Geithner has finally provided some plan details and that home sales unexpectedly rose. What I seem to be reading, however, is that this plan ultimately will not address the overpriced nature of the bad loans, and instead will burn up even more taxpayer money in an ill-favored ploy that seems based on overly rosy hopes and projections. On top of budget deficits that Michael Eden at Start Thinking Right warns could easily reach $9.3 trillion over the next ten years, it’s more obvious than ever that government spending, instead of solving the economic situation, will compound the problem exponentially by driving us into debt, inflation, and higher taxes to pay for such schemes.

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