There’s a decent article on CNN.com this evening asking about Geithner’s plan, and if it would work. It raised some some excellent points.
What we do know is that the Obama administration is offering extremely favorable terms to the potential investors. The government, as The New York Times reported this morning, would lend private investors nearly 95 percent of the money for an investment. (Here’s an irony: at the very moment we are trying to deleverage the economy, the government is now using the principle of leverage to revive it). Moreover, if the investment goes bad, the private investor is only on the hook for the small portion it put in originally – not for the full amount of the purchase. Yes, the government will share in profits, but if the toxic assets go up sharply in value – as the government hopes – the private investor could make piles and piles of money.
So if I put up 5 bucks, the government will give me $95 so I can buy something that’s only worth – ummm – crap…. No one knows what this junk is worth – that’s why it’s called toxic!
Anyway, suppose it’s worth $50. Of course the government will pay $100 for it, and when it’s eventually sold at market value, the taxpayers lose $45. And I think that’s an optimistic estimate.
The story continues….
Two questions immediately arise. The first is that raised by Paul Krugman, the Nobel-prize winning economist who has been slamming this plan unmercifully because he believes that Geithner has way too rosy a view of the underlying value of the assets. He thinks that investors, realizing that these assets aren’t really worth very much, won’t want to invest at the prices that the banks will insist on and the whole plan will ultimately fail. Instead, argues Krugman, the nation will waste incredibly valuable time on a flawed plan, allowing the economy to deteriorate still further, while instead we should be moving swiftly toward a government takeover of the banks, which he believes would stabilize the economy. We shall see who is right – Geithner or Krugman.
I think they’re both wrong. Geithner’s plan won’t work – but not for the reason Krugman gives. The plan will fail because you can’t pay down debt by going deeper into debt.
Of course if Bernanke really gets that printing press rolling, we can inflate the debt away. The only problem is that the country will also be destroyed.
Read just a bit of history. See what always happens when a country debases the currency. Throughout history, the answer is the same – the government of that country fails. Anarchy followed by dictatorship is the usual pattern after that.