Evaluating Geithner's Plan [Burt Folsom]
Still reeling from last week's flap over executive bonuses at AIG, Tim Geithner at Treasury dusted off and tweaked Hank Paulson's old plan for handling troubled assets. Paulson wanted to isolate the bad bank debts, box them up, and market them for whatever they would bring. Geithner wants to try a variation of this: Banks put up their toxic legacy assets, and, with FDIC help and federal dollars, repackage these assets for resale.
On the negative side, Geithner's plan is likely to be very expensive. Second, its success lies in part in describing these troubled assets accurately enough to create a legitimate market for them. Unfortunately, no one knows how well these assets can be packaged and resold. If, in fact, they can be packaged and resold profitably, then buyers will now need additional assurance that they won't be taxed 90 percent on any gains from toxic assets. Third, is the general problem that the strategy of massive spending did not get us out of the New Deal, and is not working so far today either.
Here is a positive point on the Geithner plan. Packaging and reselling bad assets — even at huge losses — is the market's way of dealing with bad investments. Geithner, then, is to some extent finally allowing markets to dispose of these bad debts. That method of confronting losses is superior to what Presidents Hoover and Roosevelt tried in the 1930s with the Reconstruction Finance Corporation (RFC). In the 1930s, the RFC officials made direct loans to troubled banks — and many of the banks failed anyway. The RFC could not predict well which banks could survive and which couldn't. Markets, Geithner seems to recognize, better than bureaucrats, can assign a fair value to the assets and at last take them off the books.
— Burt Folsom writes for BurtFolsom.com, teaches at Hillsdale College, and is the author of New Deal or Raw Deal?.
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