Geithner finally released his plan to deal with the “toxic assets” that banks have from the housing bust. These assets are supposedly the reason why banks are not lending.
It becomes apparent earlier that it’s not looking good for the plan when political correctness rears its ugly head. They are no longer “toxic assets” but “legacy assets.” Guess what, they are still bad, no matter what you call them.
So, after reviewing some articles some interesting points arise. First, this plan was Paulson’s and they decided it would not work and private investors would not buy into it. So, Geithner, the only guy who was capable of handling this “crisis”, so ignore his IRS issues, is stealing rejected ideas from the Bush administration. Another scary thought is the price tag, over another trillion dollars.
Lastly, the government is giving private investors loans that they don’t have to pay back. The private investors then will buy the "legacy" assets. If they assets go up in value, the investors keep the money. If they assets go down, they keep the money.
Huh? Isn’t that a bailout?
The government is giving the money to risk. Where is the risk? Can I be a private investor and buy some of the “legacy” assets?
Then, the Communist economist on the NY Times, Paul Krugman said he doesn’t agree with it. You know things are bad when he is jumping of the Obama bandwagon. But he makes some valid points in a piece on NewMax:
"The Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt," the Princeton University economist said, citing weekend reports outlining the plan.
"This isn't really about letting markets work. It's just an indirect, disguised way to subsidize purchases of bad assets," he added.
Krugman called it a recycled idea of former Treasury Secretary Henry Paulson, who later abandoned the "cash for trash" proposal.
"But the real problem with this plan is that it won't work," he says, adding that bad loans may be undervalued because there is too much fear in the current climate.
"But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus -- for that is what the Geithner plan amounts to -- will change that fact," Krugman wrote.
While the real economy is being hurt by the meltdown of the financial system itself, Krugman says this is not the first or the last time this has happened. And there are lots of roadmaps to get us out.
"It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books," Krugman said.
"If this plan fails - as it almost surely will - it's unlikely that he'll be able to persuade Congress to come up with more funds to do what he should have done in the first place," he wrote.
Hate to say it, but Paul Krugman is right. Obama is running out of time and with each blunder he is worsening the situation. I am not saying do nothing. There are so many free market principles he and the government could have done and be doing now, but they aren’t and now are the problem.
They could be cutting government spending and stop driving up the deficits. They could have infused the economy with money by giving back the People their money to spend in the market. Instead, they took money out of the economy.
Obama is making FDR and Hoover look like geniuses at this point.