Here is the mistake Geithner is making:
Roger Craine (UC Berkeley):
Lights, Camera, Action, Take One. In a rushed, poorly thought-out, one page memo to Congress in Sept. 2008, Hank Paulson outlined the Troubled Asset Relief Program (TARP) which proposed that the Treasury (i.e. taxpayers) buy toxic assets (mostly underwater real estate loans and securities backed by real estate loans) from the banks to cleanse their balance sheets and provide them with badly needed capital. It didn't take a Nobel Prize winner to figure out that the Treasury can't provide banks with more capital without overpaying (a taxpayer subsidy to banks) for the toxic assets. Still, when Paul Krugman, the 2008 Nobel Prize winner in economics, pointed out the obvious logical fallacy in the New York Times, it became even more embarrassing.
Lights, Camera, Action Take Five. On Mar. 23, 2009, Tim Geithner announced TARP Take Five which is a sophisticated (sneaky?) redo of TARP Take One. In TARP Take Five -- relabled as the "Public Private Partnership Investment Program" -- private investors instead of the Treasury buy the toxic assets. Of course, as Krugman noted, the banks won't get more capital unless the private investors overpay for the toxic assets. To increase the value of the toxic assets, the FDIC (taxpayers) threw in a valuable insurance policy. The insurance limits investors' losses to 15 percent of the value of their purchase. The insured toxic assets are worth more than the uninsured toxic assets and the investors will pay a premium. Taxpayers provide the insurance, but they don't get the premiums. The premiums go to the banks. Underneath the bells and whistles, TARP remains a cleverly disguised vehicle for taxpayers to subsidize the banks without getting compensated through partial ownership.
-- Roger Craine is professor of economics at the University of California at Berkeley. |
