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  • Geithner's Flawed, but not Larcenous, Bailout Plan

    Commenting on Treasury Secretary Timothy Geithner’s latest bank bailout plan, Nobel Prize-winning economist Joseph Stiglitz told Reuters:

    Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.

    We think “robbery” is a little strong of a word, but Geithner’s “Public-Private Investment Program” (PPIP) is definitely flawed. Heritage analyst James Gattuso details why:

    • Risk of uncertainty transferred, not eliminated. The main goal of the program is to discover the market price of these assets and to restart the market in them. The plan does a better job at this than prior proposals, using bidding by private investors to determine sale prices. However, much of the valuation will be affected by the government participation and guarantees against losses. In effect, a major portion of the uncertainty as to value is shifted to the taxpayer rather than eliminated.
    • Government entanglement in management. The plan will almost inevitably lead to even more expanded government micro-management of financial firms. Recent history with the TARP program shows that participants in PPIP can expect controls—sometimes retroactive—over compensation and other management decisions. It is hard to imagine a hedge fund or other investment group enjoying profits under this program without some level of federal restrictions accompanying the deal or following soon thereafter. It is equally possible that if profits exceed some unspecified percentage, there will be an effort to “recapture” them.
    • Lack of participation. The prospect of such restrictions may very well deter many potential private sector investors from participation in the PPIP program at all in order to avoid federal interference in their business operations. Already several banks either have decided to return TARP money or are considering returning it for these reasons, and initial participation in other programs has been less than anticipated for the same reason.
    • Problems of complexity. The process both for setting up partnerships and for purchasing assets or loans is extremely complex, necessitating identification of qualified assets, selection of approved fund managers for securities, establishment of bidding rules, conflict of interest rules, and a host of other actions. Although the government predicts that the first transactions could begin in about a month or so, recent experience suggests such a timetable is highly optimistic to say the least. More worrisome, with so many moving parts, the chances of error or poor oversight are substantial, and they only grow if the program is implemented too quickly.

    Gattuso concludes:

    There is not an imminent threat of a collapse. On the whole, financial markets are impaired but functioning. Indeed, many of these “toxic” assets are still performing despite problems in housing and other markets. Given the dangers of market intervention of this kind—not only to taxpayers in the form of massive costs but potentially to the financial markets themselves—actions such as the PPIP program should be a last resort, engaged in only when absolutely necessary. That standard has not been met.

    Posted in Economics [slideshow_deploy]

    2 Responses to Geithner's Flawed, but not Larcenous, Bailout Plan

    1. Emily, Tuscaloosa, A says:

      I am a student at the University of Alabama, and my peers and I are sick of seeing Congress squander our future. We're hosting a Tax Day Tea Party on campus and have created a website to share our conservative ideals. We've got to rally together to fight this! http://squarewondotorg.wordpress.com/

    2. ra,ohio says:

      The entanglement of the government in private enterprises should alarm anybody in America that has a brain, or any sense of the aspect that socialism is on the march in this country.

      None of these people are being specific about where BILLIONS of dollars are being spent.

      $634 Billion as a down payment on a health care system that has not been itemized, or defined ??? Only one example.

      Are the American people so stupid to take all this crap as an explanation of where their money will be spent ?

      The administration and congress are attempting to NATIONALIZE the economy of this nation, meaning the end of the ability for our children, and you, to the pursuit of happiness.

      Never let them take your individualism from you.

      You are not a sheep, or a lemming.

      They are deceiving enough people to get them back into office.

      Their program going forward is just that, re-election.

      We, the conservative individuals in America cannot let that happen.

      I didn't allude to dems/reps for a specific reason….it doesn't matter.

      Let's take our country back in 2010 and see what happens.

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