Monday, March 23, 2009

How will the Geithner Plan Ever Get Approved?

Posted on by Felix Salmon:

I do hope the Geithner bank bail-out plan, when it's announced, doesn't attempt any rhetoric along these lines:

The goal of the plan is to leverage the dwindling resources of the Treasury Department's bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending...
Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

Every dollar of private equity is being matched by 32 dollars of other people's money? What could possibly go wrong?

Krugman elucidates:

Treasury will be creating -- deliberately! -- the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn't, that's someone else's problem.

This plan, as announced, has not come as much of a surprise, and neither has the outrage in the blogosphere. But won't this plan need Congressional approval? If so, how on earth do Geithner and Obama think they're going to get it? We're way past the point at which lawmakers trust Treasury to know what it's doing: they've done that in the recent past, with disastrous results, and they're not going to do it again. And it's equally clear that this plan would be hard to defend by the most silver-tongued of Treasury secretaries; Geithner simply doesn't have the political prowess to sell this to Congress. So I do wonder how he thinks he's going to get the funding to get this plan off the ground.

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