Okay, I'm not an economist. Not even close. My calculus is so rusty, I probably couldn't struggle through the first exam in a Calculus 101 class. (Or is it 201? See, I can't even remember that much calculus.) So no, I'm no expert - don't pretend to be. So maybe this shouldn't be a surprise, but...
I just don't get it.
I appreciate that we've moved away from the "bad bank" model, something that seems primarily to be "bad for taxpayers". But I just don't see how providing capital for private investors to buy toxic assets is going to help clear up this mess. Let's say I'm an investor, and I'm not inclined to borrow money to invest in those assets at a present, near zero interest rate. That could be because I see them as too risky, as offering an inadequate rate of return, or because the seller doesn't want to admit their fair market price. Unless somebody gets subsidized how does federal money change that equation?
If I'm a bank that does not want to admit actual value for its assets because I'm bankrupt, having more potential buyers won't change that. Maybe that where Geithner's idea of auditing banks before giving them additional bailout funds comes in, assuming that plan has teeth. Their "97 cents on the dollar" entry is reduced to 38 cents, they qualify for federal aid (or a takeover), and the investor uses a federal loan to pick up the securities at their market value. But how is that superior to simply bailing out the bank and having it hold its own asset at its actual value?
Is the idea here that the money is only available to buy toxic securities, so that the private partners may decide, "Well, I wouldn't put my money on the line for a possible 0.1% rate of return, but I'll happily put free federal money on the line." What guarantees are we offering to the private partners? That we'll cover any losses if the securities drop in value - subsidizing the investors instead of the banks? How is that better than directly overpaying for junk securities through something like TARP - such a guarantee would seem to be yet another layer of lemon socialism, as with TARP the taxpayer would at least get the benefit of any increase in value. If we're not offering any guarantees, why should we expect investors to pick up the worst of the worst securities, the ones that are the biggest drags on the financial industry?
Granted, I'm working off of a public statement, pretty much devoid of details. I guess I'll wait to see what the experts have to say.... (Although the operative word so far seems to be BARF.)
Update: What are Nobel Prize-winning economists for, if not to explain these things to us, and Paul Krugman has stepped in to help me understand the Geithner plan!
So what is the plan? I really don’t know, at least based on what we’ve seen today.Wow.... I feel... so much better....