Can Somebody Please Take the Damn Economy Away from Geithner?

by Damozel | Paulson's gone, but it's deja vu all over again. Why is Obama letting this happen?  Why won't he consult people outside his own little circle of advisers -- economists such as, say, Nobel prize-winning economist Paul Krugman or Yves Smith?  Why?  Why? Why? Sadly, there's just not a lot of time for his crew to get past the training wheel stage or to learn the life lesson that an unworkable course of action doesn't work better just because you do more of it harder. 

Krugman -- give the man credit -- has bravely endeavored to be supportive of a stimulus package he said at the start was too timid to work as needed.  But he's learned the details of Geithner's plan for toxic assets, and now  Krugman really is in despair. 

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank....

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, 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....

Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard....

And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work. What an awful mess.

The New York Times has more on what I shall call The Toxic Plan. 

The plan to be announced next week involves three separate approaches.

Calculated Risk:  "More approaches doesn't make a better plan."

Okay, starting over.

The plan to be announced next week involves three separate approaches.

In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve....

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.

The article reminds us that Geithner's ideas haven't exactly drawn widespread praise from experts.

Timothy F. Geithner, the Treasury secretary, provoked scathing criticism from investors in February by announcing the broad outlines of the plan without addressing the tough questions, like how the government planned to share the risk with investors or arrive at a fair price for the assets that would neither cheat taxpayers nor harm the banks. (NYT)

John Cole is so right:  we need to listen to people who have been more often right than wrong. "The administration might learn from this approach," he says.

Indeed.  Yves Smith remarks:

The New York Times seems to have the inside skinny on the emerging private public partnership abortion program. And it appears to be consistent with (low) expectations: a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for crappy paper....

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone's eyes to glaze over.

Dean Baker at TPM:

Timothy Geithner and Ben Bernanke could not see an $8 trillion housing bubble as it was growing to ever more dangerous levels. Remarkably, it seems like they still cannot see the housing bubble even as its collapse is leading to the most severe downturn since the Great Depression.

According to the NYT, the new bank rescue plan works on the assumption that: "because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come."

House prices have another 20 percent to fall to correct back to trend levels. Unless someone is smoking something illegal, they have zero reason to believe they will rise again.

This is painful.

Atrios:

Paulson kept proposing versions of this, but even he wasn't dumb enough. Sadly, Timmeh is...

As Dean says, if the reporting is accurate Timmeh is even dumber than I think he is.

Krugman has more. We are so screwed.

Back to  John Cole:

If this were a medical emergency, it appears it would look something like this:

The Illness- reckless and irresponsible betting led to huge losses
The Diagnosis- Insufficient gambling.
The Cure- a Trillion dollar stack of chips provided by the house.
The Prognosis- We are so screwed.

If these guys are right, this will be the undoing of the Obama administration. Better enjoy this four years, libs.

Krugman, by the way, isn't only upset about the Toxic Plan.  Yesterday, he called out the Obama administration for its role in the give-taxpayer-money-to-AIG-executives scandal and the resultant tax bill. 

Preliminary thoughts on the tax bill:

1. It’s not the way you should make policy — it’s clumsy, and it will punish some innocent parties while letting the most guilty off scot-free

2. But — there wasn’t much alternative at this point. And for that I blame the Obama people.

[I]t’s part of a pattern. At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis — that they believe that all we have is a liquidity crisis that can be undone with a bit of financial engineering...

This was bad analysis, bad policy, and terrible politics. This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers. And that leaves it with no ability to counter crude populism.

Is Obama going to be as stubborn as Bush about sticking to his advisers' wrong ideas?  If so, it's already too late...

Memeorandum has more.

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