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.”