Economist Brad DeLong Defends Geithner Plan; Progressives Respond; Sen. Judd Gregg (R) Joins Chorus of GOP Critics, but Holds Back on Sharing the GOP's Much Better Ideas for a Fix

by Damozel | The debate wags hotly on.  As an ignorant layperson, I am slightly cheered to find that one economist I respect thinks the Geithner plan could work and explains how it will reduce unemployment and get things moving forward.  Any ray of hope is better than none.  A plus: DeLong's overview is presented in the form of "FAQs," by which he really means questions that the ignorant layperson would have asked if the ignorant layperson knew enough to know what the questions ought to be.   E.g.,

Q: What is the Geithner Plan?

A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit.

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?

A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

It's a useful outline of what we have to hope for:  a best case scenario, I suppose. 

Paul Krugman still isn't buying, of course, though he praises DeLong for giving it "the old college try."

[H]e shies away, I think, from the central issue: the non-recourse loans financing 85 percent of the purchases....

Brad treats the prospect that assets purchased by public-private partnership will fall enough in value to wipe out the equity as unlikely. But it isn’t: the whole point about toxic waste is that nobody knows what it’s worth, so it’s highly likely that it will turn out to be worth 15 percent less than the purchase price....[T]he whole point of the program is to push prices up to the point where we don’t know that it’s undervalued....

I’m with Atrios here. If getting the prices of toxic assets “right” isn’t enough to rescue the banks, that doesn’t mean that we’re doomed; it means that we actually have to, you know, rescue the banks, Swedish style, rather than rely on fancy financial engineering to make the problem go away.  (Krugman)

At Angry Bear, Ken Houghton says:

The Geithner Plan FAQ is worth reading; it's a classic example of treating an incomplete market as if it were the entire market....Unfortunately, while Treasury plays in the wading pool, hedge funds have The Whole Wide World in which to romp....

I would have thought by now that economists would know what happens when you create bubbles in a market. That doesn't change when just because you use the U.S. Treasury as a Fluffer.

The laconic and yet always strangely prescient Atrios never minces words.  So what does Atrios think about DeLong's argument?

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?

A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

So if shitpile is really as shitty as I think it is, then without Timmeh's cunning plan it's Mad Max for all of us.

Actually, it's worse than that, it's "If Timmeh is wrong about the ponies in Big Shitpile then it's Mad Max for all of us."

Yesterday, James K. Galbraith likened the whole Geithner structure to a "Rube Goldberg device." [Insert your own courtesy gallows laugh here.] 

I must say, I like Galbraith's "Rube Goldberg device" better than Atrios's "Big Shitpile" with imaginary ponies for which we are to dig. When I was a kid, we used to play a board game called "Mousetrap" the object of which was to build one of those Rube Goldberg devices.  Sometimes it actually worked and the little cage came down at precisely the right moment and caught the mouse. 

I'm hanging on to that thread...hanging....hanging....

Then along comes Avedon Carol and snips it right off.

Brad DeLong's explanation here of the thinking behind the Geithner plan would make me feel all optimistic if I didn't know that most of the assumptions underlying it are wrong. People can't afford to buy at the current inflated prices. I'm not just talking about the rates, but the actual prices. Those prices are based on what people paid in an inflated market based on fraudulent assurances from lenders. Other people simply gambled on side-bets using other people's money or money that didn't even exist….

The assets are not fundamentally undervalued, and the reason they are called "toxic" is because they are poison - and poison doesn't magically become non-toxic just because you let it ferment for a while.

Meanwhile, the Chair of the Council of Economic Advisers thinks Krugman, Galbraith, Atrios, Avedon Carol, and the rest are "just unfair." Curse you, nattering nabobs of negativity!

Her explanation for why the Geithner plan will work sounds to me approximately like someone explaining why blood sacrifice appeases the gods and makes the crops come to fruition, but that, doubtless, is because I am an ignorant layperson.  She said:

"Keep in mind why we are doing this. It's precisely because banks have these [toxic assets] on their books... We are trying to help the taxpayer by using the expertise of the market by trying to set the price for these toxic assets... It is going to be safe, we very much have the taxpayer's interest in mind, but we also very much have the interest in the economy in mind."  (HuffPost)

Progressives don't march in lock-step:  never have, never will.  (Right wingers who are happily gloating over the debate over the economy don't understand this, of course.)  I for one am happy to see Obama's supporters challenging his solutions.  "My president, right or wrong" is not a good slogan for people living in a free democracy. 

Anyway, give the progressive critics this:  they do know what ought be done to mitigate or vitiate the harm -- even I know by now.  The problem is, the Swedish-style remedy Krugman mentions is a jagged and bitter pill for those who love their free markets and financial capitalism and want to get back to the status quo ante.  

In the meantime... where are the big ideas from the other side of the Great Divide?

What say the Republicans about this mess, other than, "Obama can't fix it, can't fix it,  can't fix it"? 

At CNN, "one of the keenest fiscal minds on Capitol Hill" Republican Judd Gregg says that Obama's budget will bankrupt us all without saying what he should be doing instead. 

Did they just leave that part out?  Look:

The practical implications of this is bankruptcy for the United States,” Gregg said of the Obama’s administration’s recently released budget blueprint. “There’s no other way around it. If we maintain the proposals that are in this budget over the ten-year period that this budget covers, this country will go bankrupt. People will not buy our debt, our dollar will become devalued. It is a very severe situation.”....[He]also told CNN Chief National Correspondent John King that he thought it was “almost unconscionable” for the White House to continue with its planned course on fiscal matters with unprecedented actual and projected budget deficits in the coming years."  (CNN)

Instead he proposed.... he proposed.....?   He proposed to....  Er.

Huh.

Too bad "policy differences" with Obama kept Gregg from accepting the job as Commerce Secretary. 

The GOP must know how to fix the economy because they never stop going on about how Obama has got it all wrong.  But neither they nor Sen Gregg is yet willing to tell us.

Pretty soon we need to hear the secret GOP plan for pulling us back from the edge of the cliff and making things different. 

But -- and to get back to the original point -- oddly enough, Sen. Judd Gregg approves of Geithner and has "broken ranks" with the GOP in saying so. 

Despite his criticism of Obama’s approach to the long-term finances of the country, Gregg praised how Obama’s top economic lieutenants are trying to get the sick banking system back to health.

“They’re doing the right things,” Gregg said about embattled Treasury Secretary Timothy Geithner and White House economic adviser Larry Summers. “They haven’t done it as definitely as they should have . . . but they are moving in the right direction and the Fed is moving in the right direction,” Gregg said on CNN’s State of the Union.

Gregg broke ranks with some of his fellow Republicans and said he did not think Geithner should step down from his Cabinet post.  (CNN)

Uh oh.  Hear that, Brad DeLong.

So...Geithner isn't the problem; it's everything else?  He's moving us in the right direction but we're doomed anyway?

That's so very GOP...so very, very Hoover.  We're doomed -- DOOMED -- and they don't know how to prevent it, but that doesn't stop them from trying to stop Dems from trying. 

Memeorandum has more.

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Comments

[Charles]

I did a defense of the Admin at phoenixwoman.wordpress.com/2009/03/22/in-defense-of-the-administration/

Just to be contrary.

[Nathan Piazza]

Doesn't all this depend on what the value of these assets really are? And won't the success or failure of this plan have to depend, to some extent, on the ability of potential investors to evaluate their level of risk? Will the huge investment management firms that are the proposed bidders be bidding on things whose value they truly have no clue how to estimate? Or will they be working from some kind of privileged, insider knowledge?

Because otherwise, Geithner's plan seems to be nothing more than the creation of a new bubble that lasts long enough to transfer bad assets from one kind of financial institution to another.

It reminds me of this old joke about a kid who sells turds to his friends by calling them "smart pills". Are the potential buyers of these assets in any better position to evaluate their worth than the banks that currently own them? And if so, I'd like to know how and why - are they scurrying even now to identify the parts of the "poison" that is least poisonous? Is Geithner basically inviting them to play a game of absolute roulette? (Because there really is NO way to evaluate these assets, and there never will be. And nobody in the world knows any better than anyone else what they're worth?)

Because it seems to me that a big part of what may be going on here is that it is precisely the people who gamed the system in the first place who know where the opportunities and the risks really lay - but they're not saying, because having such knowledge is potentially extremely valuable, AND simultaneously incriminating.

In other words, the people most well-positioned to benefit from Geithner's plan are exactly those who got us into the mess. It's like paying Lex Luthor to stop the time-bomb he planted in the center of the earth. And THAT's the dirty secret of the Geithner plan. That the only way out of this mess is to reward criminal behavior with massive profits at taxpayer expense.