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Posted by on Mar 22, 2009 in Economy | 15 comments

Upon Reflection, The Toxic Asset Plan Is Even Worse Than At First Glance

I had meant to not discuss the Toxic Asset plan too much before it was officially announced, so I thought my prior post would be enough. This idea in particular has seen many iterations that would cause outrage if enacted, but they were never even formally proposed because of the backlash from the leaked details. However, this plan is SO bad, and it seems that they will actually propose it tomorrow, that I can’t help myself.

Yves has followed up her original post with one that offers some hypothetical but relatively realistic scenarios proposed by commenters. The conclusion is clear: this plan involves a largescale transfer of money from the taxpayer to large asset managers, and the total losses in the system will increase dramatically, perhaps by 20-30%. As Yves says, “Folks, this IS even worse than I thought, and you know I have a constitutional predisposition to take a dim view of things (although it was clear from the get-go that the introduction of private parties to give air cover to the Treasury would make the exercise more costly without adding any value).” The commenter that proposed the scenario was even more blunt: “How did fraud and money laundering become the national economic policy of the US? One would have to be a criminal to participate in this.”

Hilzoy has a roundup of reaction and highlights that Brad DeLong is in favor of the plan. Hilzoy characterizes it as the “strongest case I can think of for it” and I agree with that observation, which is what makes its contents so amazing. DeLong readily admits that the hedge funds and banks involved stand to make “a fortune” if the assets recover, and that the government is literally just giving them money for nearly no risk — in fact, as other commentators have pointed out, due to the non-recourse loans it is almost entirely no risk! It is just a blatant give away of hundreds of billions of dollars to the very people that got us in this mess at best, and will put the government on the hook for trillions more in losses at worse (or in my opinion, realistically).

But look at how DeLong frames the whole debate:

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.

I responded on Hilzoy’s post:

Um, we had the largest bubble in the history of the planet. Simply going back to historical valuation and then rising at historical rates (housing tracks inflation perfectly, so if assuming a 2% inflation rate) would STILL see housing not get back to normal price values…and that’s not even including all the hits from defaults that are going to occur.

That is fear mongering, plain and simple. The most realistic way that “bottled water, sewing needles, and ammunition” will be the only thing of value is if the government continues to try to bail out everything and causes a hyperinflationary spiral…not if they take over the banks and force writedowns!

The more generous take is that the plan is betting that the entire crisis is an overreaction, and that we can blow up the bubble again by transferring large amounts of wealth to the deal makers that got us in this mess. I for one think it’s not an overreaction, but a rational readjustment in response to an unsustainable bubble, and as such the government is simply transferring enormous amounts of the nation’s wealth to the exact people that caused us ruin.

I try to avoid euphemisms when describing things, and the only way I can describe this plan is that it is the closest you can get to outright theft from taxpayers as can be, aside from simply writing a check. I can’t but help again reference the Wikipedia page on the Helicopter Drop: “The term helicopter money is meant to portray the image of a central banker dropping money on people from a helicopter. Political considerations make it difficult for a monetary authority to grant the money gift, because individuals and firms not receiving free money will exert political pressure. The monetary authority must act covertly to give gift money to specific individuals or firms without appearing to give money away.

That is exactly what is going on, the plan must not be implemented and the failure should be used to fire Geithner. Otherwise, all faith in the government will be lost as the bills pile in and people figure out what happened.

That said, I can’t help but point out the craziest description of what’s going on, and that belongs to Judd Gregg.

“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.”

“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.

What? That makes no sense at all, and this is something that Republican ideology that government “spending” is always bad (except when they do it) manages to completely mess up. If the government is taking on lots of debt to spend within the country, then it will circulate within our economy and how effective it is depends on how well that money is spent. We do still have to worry about foreigners buying our debt and dollar devaluation, but in theory it could stimulate the economy broadly. On the other hand, the moves that the Treasury are making are guaranteed to cause dollar devaluation and indeed, that’s the point!! Moreover, it is flowing to the people that already have (or at least manage) most of the country’s wealth, so it will have very little stimulus effect. Talk about cognitive dissonance…and this comes from Gregg, “known as one of the keenest fiscal minds on Capitol Hill.”

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  • pachigordo

    There you go again Mikkel – two steps ahead of me. But I’ll leapfrog ahead on this topic in a few days or weeks. Remember my prior post about creating a new parallel banking system? Let’s allow T.S. Geithner to hang himself for a few days. I already wrote in TMV last week that it’s his turn to be thrown under the bus.

    I suppose after another $1 or $2 trillion in contributions, bailouts, transfers, helicopter gifts/drops, etc. to the wealthiest in our society, that we will see income and asset inequality increase within the next 2 years to levels exceeding the huge disparities we created over the past 20. Who is now buying up all those bargain houses from foreclosure sales? Congress is already balking at all the proposed tax increases (actually letting rates rise back to 1990s levels) so our budget deficits will be completely out of control.

    If Obama doesn’t get it soon, he’ll be considered G.W. Bush’s 3rd term. My fear is that after a few more trillion dollar gifts among friends, they will be back for more – it’s never enough with capitalists. Even Hoover complained that the problem with capitalists is that they’re too greedy. Some things never change. We can forget about improving our national transportation, education, and energy infrastructures in such a financial bind. We’ll all be owners of many tons of junk paper. I’m not sure owning those toxic assets can build us many bridges to the future but at least those who created, marketed and profited from them will be made whole and even wealthier with the next bailout plan.

    Perhaps if no one listens to the American people – we just decide to strike. $1 trillion dollars is $3,300 per person in the U.S. Until we get our own bailout, we should all stop going to work, stop all payments on mortgages, car & student loans, and credit cards. If most everyone turned their backs on the government and our bankrupt banking and financial system – what are they going to do? Perhaps the power of non-violent revolution is needed at this point in time. Our leaders are not listening to us – well we can just stop playing along to their outright fraud and massive theft of our economy. (We can’t intentionally stop paying taxes as that might be prosecuted as a crime but some might decide that a viable option for them – and it would be too many for the federal court system to handle.)

    Keep up the good work – perhaps we all need to take a swim in the ocean to get the bigger picture and relax a bit. Best wishes from a co-blogger – Marc Pascal in Phoenix, AZ.

    • mikkel

      Well Marc if it’s any consolation, I thought your post about the parallel banking system was one of the finest pieces of original thought that TMV has seen about the economic crisis. I tend to focus on review and explanation because my ideas about how to move on require radical reevaluation of economic thought, and it’s hard to describe a new branch of economics in blog posts. I’ve mentioned some of the precepts in posts here and there a few months ago, but only a few commenters seemed to be able to follow.

      About the strike, I am getting close to that point. My concern is that there is not the required populist movement to go down that path. Reactionary populism is growing strongly but there is no moderate/progressive populism to provide an alternative vision. I’ve been watching Glenn Beck (and have been always relatively abreast of libertarian populism) and I have to admit that he is almost completely 100% correct in his diagnoses (with the exception of seemingly defending wealth inequality) but his solution is to move towards an anti-government, faith oriented, radical individualistic type populism. Those seeds have been planted a long time, and have a decent amount of the population behind them. Twenty to thirty percent of the population looks small when there is a strong system, but it is massive when that system fails.

      Being someone that isn’t religious and is rational, and that believes that government isn’t always a problem, just that this government has become a large net negative, I am very wary of that sort of populism. Moreover, I think that it would lead to a global crisis and war for resources, because it would be an abrupt end to international cooperation. If people think we have it bad now, just wait until international credit dries up and the oil stops flowing.

      On the other hand, part of the reason I started posting on TMV was the sincere belief that we would get to the point where a mass populist uprising would be required. The status quo is fundamentally broken and will lead to the collapse of the global system as well, and our leaders are too wedded to it to change course. As such I keep begging for there to be the start of what I call “rational populism” which is a populist movement that is based on analysis what we can expect based on historical valuations, recognize the key international points of cooperation that must be kept, and figure out how to decrease our standard of living in a way that will keep as many people fed, clothed and housed as possible as we move through the transition. It also recognizes that the key to our rebirth is through the reworking of our financial, scientific, energy and production infrastructure. I fail to see how individualistic populism can hope to address those points.

      That’s why I’ve been so despondent when many people that I think could buy into that sort of populism were defending the bailouts as “necessary” over the past few months, because the only frame of reference was the reactionary populism I referred to. Fortunately, I think a lot of people (I’d include you, Elrod, Hilzoy, Krugman, and the like in that) are realizing that it may come down to standing up against the government, and there is perhaps still time to get in front of the anti-government wave that is coming and provide an alternative.

  • catransplant

    Right on.

    Originally I thought that the bailout although far from satisfactory was necessary. Gie
    But Geithner’s (and Obama’s) complicity in the AIG bonuses –with the resulting unconstistitional move to take them back, led me to your conclusion.

    Most Americans are outraged at big business. They should also be outraged by big governement. Whatever was in the stimulus bill is not a sound investment should get zero funding in the future.

    We have allocated almost 2 trillion dollars without as thing to show for it. This is the biggest ripoff of all time.

    The .President advocates responsibility but laughs when he says he is responsible. Well he is responsible, and he ought to be held accountable hourly to the noble oath of office that he took.

    The key is responsibility. Obama has made the government solution so bad, that hisoric freeloaders like GM, some states and banks are saying no thanks. Is it the President’s mastler plan to make to make the government role unpalatable?

    Then comes the budget. We have seen the tip of the iceburg that ripped the ship of state-now for the crushing blow.

  • AustinRoth

    Folks, what do you expect? When you have an administration that starts from the proposition that the US money supply is theirs, that the government decides how much you are allowed to earn, and how much of that you are allowed to keep, and that the solution to all problems is for the government to take over, why oh why would you be shocked at what is happening?

    We are not even three months into the Obama Administration. It has only begun. Two years from now this will seem like good times.

  • AustinRoth

    OK, I have to say it, and say it loud: I TOLD YOU SO!

    And how ling until it expands to the automotive industry, then manufacturing, defense contracting, education, ANY company, ALL companies?

  • pachigordo

    Sorry AustinRoth, you might have missed the point of the original posting. It’s not government intervention, it the choices of intervention being debated. Both Republican and Democratic Administrations and Congresses see government as a force that will pick winners and losers for the best interests of the country. However, those with access to our politicans have become a very small and wealthy group and thus their opinions now matter more than those of the vast majority of Americans.

    I agree with Fishman’s take on Mr. Beck who gets the problems but screws up the solutions. I believe many people need moral, ethical and religious foundations in their lives and it is not bad to speak in terms they see as valid. However, the golden rule “do unto others as you would have them do unto you” no longer applies. It appears some very wealthy people no longer view the rest of society as “one of them” to be considered for ethical treatment. We have gone to the full excess of our capitalist system with self-centered greed dictating too much of our relationships and business decisions. I am amazed at the relative silence of many religious leaders on this unfolding ethical and economic mess.

    I am unsure whether a third party can make it in this country as money determines most political success. I do not see many people donating to a new party of realists unless they see some short and long-term benefits. Perhaps a new party should start small and just try to get a controlling number seats in the Senate (2 to 4 seats) and the House (12 to 24). That way it could broker most deals out of a divided Congress. Too many prior third party efforts were centered around big personalities running for President but nothing at the Congressional or more importantly, the state level.

    Thanks for the compliment on my proposed parallel banking system. I hope other writers start making original proposals to be debated fully within TMV. My proposal was more of a failsafe measure and a way to restore trust in the system that has become ethically and financially bankrupt. If the Geithner plan fails, we would have an alternative already in place serving the American public. Even if the Geither plan isn’t so bad, it will take many years to see thru and the economy needs new, trustworthy, ethical, well-run and fully functioning banks without any toxic assets on their books for the purposes of investment, deposits, lending and financial services. The parallel system needs to be up and running by the end of 2009 so some sort of recovery might be possible in 2010. However, the huge transfer of wealth to those that imploded this economy by their actions is very distressing as it prevents addressing other important needs.

    Remember Ronald Reagan the eternal optimist said that the deficit was big enough to take care of itself and things did work out in the end. Reagan, Bush and Clinton all raised taxes to reduce deficits. Perhaps our current Congress may be completely incapable of making such decisions. Best wishes and I hope everyone has a good week. – Coblogger Marc Pascal, PHX-AZ.

  • DdW

    Apparently Wall Street liked it:

    Dow Leaps 497 Points on Enthusiasm Over Treasury Plan

    Wall Street reignited a two-week rally on Monday, fueled by
    the government’s plan to help banks remove bad assets from
    their books. The government’s program would tap money from
    the government’s $700 billion financial rescue fund and also
    involve help from the Federal Reserve, the Federal Deposit
    Insurance Corporation and the participation of private
    investors. The Dow Jones industrial average closed up nearly
    500 points, or 6.8 percent, and the broader Standard & Poor’s
    500-stock index rose more than 7 percent. The Nasdaq rose
    more than 98 points or 6.7 percent

    But you guys may still be proven right tomorrow, or the day after tomorrow, or…

    • mikkel

      Dorian, you have to appreciate that on a relative basis, inflation should cause stocks to rise (as long as it doesn’t cut too much into purchasing power) because it will force money out of savings and chasing higher yields. Although I don’t think that’s the main reason, I think that you have to look at it as a great deal of wealth flowing into the financial sector and they are the ones that are the market makers on Wall Street, so it’s seen as a positive for that.

      Of course that’s still not the main reason, because this is a technical rally due to an oversold condition. It had all the classic signs, and I’ve been in the market for a bit over two weeks (I was one day off, I was expecting the rally to start two weeks from last friday, and it started two weeks ago today, but eh) and expect this to last through May, into June. The market should rally another 15-20% before it pauses, and will probably fall a ton in the fall again. Although I’ve made 500% return off this move, it’s been depressing.

  • DdW


    Thanks for your take, strictly from a market viewpoint (technical rally, bear market, dead cat’s bounce, etc., etc.), and a knowledgeable viewpoint at that..

    I, as a non-economist, an an American who wants our economy to recover as soon as possible, am sick and tired at the nay-sayers; those who want this recession to last—or even get worse—strictly for partisan purposes, and so they can say “I told you so.” (And those who fall into this sad category, know who they are—not necessarily those who comment on these pages)

    Call me naive, or whatever, but that’s why you’ll have to forgive me if I look at every bit of good news about out economy, no matter how tiny; at every upward move in the market, even if it is a “technical rally”; at every encouraging sign, no matter how fleeting, with the eyes of an optimistic American who wants our President NOT to fail, our economy NOT to fail.

    If that’s too radical for some, then so be it.

    But, Mikkel, thank you for your goodwill and patience.


    • mikkel

      I understand your desire, but I have a contrary take on it. The last few years I have seen this coming (or more accurately, I have read from people that have seen it coming and picked out the pieces that seemed to have the best arguments and created a cohesive picture of what I thought would happen) and things are unfolding according to my worst fears.

      I am one of the most eternally optimistic people I know, and think that solutions to nearly everything are within our hands; but its tempered with skepticism, realism and acceptance that intellect is not enough.

      What this means functionality is that I am nearly the first to develop ideas and excitement about solving/discovering things, and one of the last to accept that we’re there.

      When I got to the lab I’ve been working a bit the last few years I found them completely stagnant and intellectually lost. They had wisps of ideas about where to go, but no way to turn it into a concrete framework. I convinced them that they had to go down a path that would be revolutionary for the field and of course would be met with a lot of resistance because of that…a few people had tried before but failed to break through in any meaningful way.

      They had enough faith in me and started down it even though they knew that there would be opposition, because there was no other way. My boss flat out told me that the careers of a half dozen people were riding on whether I could bring them through to it or not.

      It was exciting to jump in and have all this new work to do and get all these possibilities, and we presented it in that form for several grants. They were all rejected.

      And so the lab came close to running out of money but we pressed on. I decided to change tracks..there was no longer the need for me to be a cheerleader or teach everyone else the basics, so I decided to help guide them in a way where they could prove what it was worth.

      And so I started saying, “No.” Instead of being excited about a couple of pieces of evidence that maybe we could explain something, I said, “No it’s not there.” I paid attention to how they were doing their experiments and said, “I know this is what you’re used to but I want you to do it this way instead” and if they wanted to do something that couldn’t give me what I needed, I said “No, we shouldn’t try to use this analysis then.” They started to joke about how everytime they got their hopes up talking with each other that I”d instantly crush them and how I was such a spoilsport. At times it felt my bosses wanted to give up because we were hardly working on anything — and their bosses were very mad — but I assured them that once we did get things to work, we’d have so much to apply it to and so much money that we wouldn’t know what to do.

      It turned out that most of the things that looked promising weren’t, and most of the experiments that could have been very cool were impossible and most of the system that we hoped would work one way that we could say our ideas uncovered didn’t and the old way was good enough. And at some point — I dunno when — I started saying “Yes” a lot, and from that everyone started coming up with these amazing ideas that no one would have ever thought of, literally impossible without our mindset, and things that if they work out will be some of the biggest advances in the field. We have gotten several grants and are on the verge of getting several more, and could become 3-4x the size of when I got there.

      The change happened when I decided to be tougher and start saying “No” and deliberately downplaying any optimism about individual pieces, while simultaneously reassuring everyone we were on the right track and that if we kept being stringent things would eventually get clear.

      In a way my posts are constructed to do the same thing. Optimism about the future is necessary for cooperation, for appreciation, for survival. Optimism that things will be OK has to be there. But we have still just barely begun and the numbers and dynamics are there, and we are close to the worst part of it; the part where we have a choice to make whether we continue to insist that the system is not broken and hope things will be ok, or whether we accept failure, protect those that need protecting and rebuild. I have long thought that by embracing failure, by saying “No” at each false dawn, and accepting that the dreams are gone, we will be in a much better position to prevent a humanitarian crisis when the system breaks. If it breaks before that, if the majority of people are sitting around hoping and it fails…then it’s too late. Cooperation will end, distrust and rage will explode and it will be a fight in the pits just to try to keep everyone from scattering and going everyone for themselves. I’m talking not only about individuals, but nations. That tipping point will be fierce and unpredictable, and right now it looks like it is most likely to explode out of East Europe and sweep through Europe’s banking system, bringing down the whole thing. In other words, the catalyst is outside our direct control, and a lot of the programs to try to right our ship is making theirs worse.

      So yes, with my posts I purposefully try to crush fleeting signs and hopes, and point out what is likely to happen based on my reading of what’s going on. It’s been weird having so many people on TMV berate me in the comments over the last few years (before I was a poster I used to comment a lot about this stuff) for “wanting” things to fail or that I was crazy or that the government could fix it or whatever, that there was no big deal; and now that everyone accepts there is a big deal they all so sound so knowledgeable and opinionated, but still miss the core point I’ve been saying all this time. Of course I’m nothing, what’s worse is that the people I read that are experts and saw this all are still being ignored while the people that didn’t see anything tout their plans and opinions…the world is a strange place.

      • DdW


        First, I want to thank you for taking time to provide an in-depth, well reasoned, and from the heart response to my comment.

        Just as you say “I understand your desire,” I believe I can say, I know where you are coming from, admire your accomplishments in the lab, and understand your position, based upon your own experiences and success.

        Just one “comeback” comment and we’ll leave it at that.

        While there is no way I can match my economic/finance knowledge to yours, I can only rely on the “experts.”

        I believe that it is probably a fair assumption (if you leave politics out of the equation), that about half of the real experts feel that the Obama administration is doing generally the wrong things to save our economy, and the other half believe that the administration is generally doing the right things. (I know there are a lot of “in-betweeners”)

        Given this assumption (and I have no way to prove it right , nor do I believe you can scientifically prove it wrong), what is it then that could make the difference between success and failure in rescuing our economy?

        In my humble opinion OPTIMISM, is the answer.

        Similarly, given the same assumption, there is nothing that can more quickly, more irreversibly, more dastardly doom our chances for a speedy and full recovery than the incessant and disingenuous nay-saying, obstructionism, and what in some quarters is openly hoping that those efforts will fail.

        Right or wrong, there is where I am coming from, Mikkel. But whether I am right or wrong, I hope our economy will not fail.

        Thanks again,


        • mikkel

          I hope that I am completely wrong and the economy doesn’t fail. Better to eat crow…especially since all my grand plans would be a lot easier to accomplish if we recover.

          This exchange reminds me of one I had with GeorgeSorwell a month ago (apparently I wasn’t as burned out as I thought). I think it does a good job of summarizing where I’m coming from and if you have questions feel free to ask.

          I just want to highlight the primary two points to get from it:
          Expert economists are experts in economics, which is largely a theoretical exercise built on assumptions that are not necessarily realistic, and in many cases aren’t realistic at all. Even economists admit this.

          At the end of the day “money” represents something real, but our financial system got ahead of the real things that keep us running (oil, basic metals, etc.) and either we pull back the financial system or else we have resource shortages. The largest flaw in macroeconomic theory is that it treats the world as having an infinite supply of resources and thus everything is based on human relationships…this is not true at all. The focus is on the financial system, but the source is fundamentally a resource-demographic crisis.

          • DdW

            I did go to your exchange with GeorgeSorwell–one that I had missed–and again I must tip my hat to you, for your patience and courtesy–and of course for your knowledge of economics and of financial systems..

            If this was a debate on economics/finance, neither George nor I would stand a chance.

            But all I am trying to inject into the discussion is the notion that, even in the “financial system” (You have already admitted that “…economics, which is largely a theoretical exercise built on assumptions that are not necessarily realistic, and in many cases aren’t realistic at all.”) there may be–should be–some room for expectations, hope (I know many will snarl at this), the attitude of people, financiers and the government, and OPTIMISM.

            And I stick to my unscientific, laymen’s opinion that given the assumption that if half the experts support the administration’s efforts in this area and half the experts oppose it, it could be that lack of optimism, partisan opposition, and more to the point, constant denigrating criticism and obstruction may just be what it takes to sink the ship, our economy.

            Something about the self-fulfilling prophecy.

            But then again, who am I to propose such a foolish notion.

            Anyway, thanks again Mikkel for all your patience and courtesies

            Please don’t feel you need to comments on my ramblings.


  • CStanley

    D.E., what I hope you can understand is that sometimes optimism in the face of a reality which is turning in a negative direction is misplaced optimism. I keep coming back to the analogy of the opposition to GWB’s Iraq War policy. Surely you can see that many of us felt as you do now- that the dissenters were actually harming the chances of success in the war (all military conflict depends on having political support- you can’t fight a war on behalf of a country that doesn’t support the aims of the war.) We felt that getting behind the troops meant that we had to support the war effort regardless of whether or not one felt that it was the correct course of action for our country to have taken.

    In hindsight, I can more clearly see that many people who dissented did so on principle, and EVEN THOUGH they didn’t want our country to fail, EVEN THOUGH they felt it important to support the troops, they just couldn’t support a mission that they felt was wrongly decided.

    The way you feel now is how I felt then- that dissenting from the Obama administration policy is weakening the chances of success of his plan. I understand that, but the fact is that his plan will either succeed or fail based on whether or not it will correct the problems, not based on whether or not we all think positive and withhold any criticism.

    And most of all, I hope you will consider the fact that much of, or most of, the criticism and dissent isn’t based on partisanship. It offends me greatly that anyone would think that I oppose these plans for reasons other than wanting what is best for our country, so please stop painting with a broad brush or harping on individuals that you feel are doing this as though they represent the voice of all opposition.

  • DdW


    Fair point(s).

    But, re: your “so please stop painting with a broad brush or harping on individuals that you feel are doing this as though they represent the voice of all opposition”.
    As I posted before:

    “I, as a non-economist, an an American who wants our economy to recover as soon as possible, am sick and tired at the nay-sayers; those who want this recession to last—or even get worse—strictly for partisan purposes, and so they can say “I told you so.” (And those who fall into this sad category, know who they are—not necessarily those who comment on these pages)”

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