Thursday, February 12, 2009

The Geithner Proposal - On Second Thought

Initially, I thought the Geithner plan seemed pretty stupid and unfinished. I still believe it is both of those things, in its essence, but I have come to realize that it actually has some merit, albeit through unintended consequences. Bear with me and I will explain.

First of all, the Geithner plan is a direct descendant of the Paulson plan, which makes it fundamentally misguided and immoral in nature. Also, the most counterintuitive of arguments is its main premise: that private investors will want to buy toxic assets that are worthless because the same investors turned their backs on them.

Now, the important thing to remember is that there are different kinds of so-called toxic assets. I’m not sure who came up with the term, but it seems to mean that nobody wants to buy the assets, that they have somehow become “contaminated”.

In most cases, they are contaminated for a reason, such as that they are made up of mortgages for houses that have actually been torn down or have lost more than half of their values. In other cases, however, the assets are sort of guilty by association.

In the eyes of a capitalist economy, whether or not an asset is actually destroyed or just guilty by association does not matter; an asset is only worth what someone is willing to pay for it.

If Geithner’s plan can help to separate out the two kinds of assets and entice investors to buy the ones that are not as bad, then the plan will have achieved something. An asset like this would have to be something rather special though. It would have to be:

- unrelated to the housing market

- unrelated to the continued existence of firms that are very near bankruptcy, which includes many banks

Also, the buyer would have to have a long-term strategy, because there is simply no way that the stock market will achieve any stability, probably for years to come. I have no idea how many assets that fit all these criteria there are at this time, and I don’t think anyone has.

Circling back to what I said in the beginning about unintended consequences, what I have just described is not what the plan meant to do. Geithner wanted investors to buy the assets that in fact have been destroyed, and that will happen when hell freezes over.

Another important point that I’d like to mention, and one that I will come back to soon, is the reason for this confused and unfinished plan. What most people don’t realize is that politicians have no idea what’s going on. They don’t know what these assets are, how they came to be, or how to solve the problem of them being worthless.

I happen to work in a large office building in midtown Manhattan, and ever since Bear Sterns failed, I have seen officials from the government running around in my office building and other buildings, talking to experts in financial trades, banking regulation and more, trying to understand what is going on.

Long story short: it’s not something you learn over a few doughnuts.

Moreover, I advise that the winner-takes-all voting system should be destroyed.


Anonymous said...

I don't understand why everyone in washington is refusing to be honest about these debts?

The banks debts will not be paid off and that's why obama is going to have to print money and literally give it to them.

However, the consumers, who are now being laid off in the masses, are also not going to pay off their debts. However, no bailout is coming there way.

So why, given these facts, does obama think it is wise to try and force these BROKE banks to lend my money back to me, when I am laid off, broke and in debt?

Why can't these supposedly smart people just use their common sense?

I don't need more credit. I need help paying off my existing debts and if I don't get that help, I'm not going to spend.

Lisa said...

Jacob, you are an accountant, right? Based on the numbers and the facts, do you not believe that the whole system is headed for collapse in the very near future? It seems to me if we cannot function without the big banks, and the big banks are trillions in debt and must have a constant stream of bailouts to stay in business, eventually it all has to fall. How can the people keep these institutions afloat when most prople are in crushing debt themselves and fewer are going to be employed every month, and we have ever encreasing interest on the National Debt to pay ETC ETC ETC ETC!

Look, I'm not even very good at math but I can tell that the numbers DO not add up. We can't solve this when the banks are rotten and the politicians are clueless and corrupt. You must know that our system is headed for collapse, and yet unless I missed it, you haven't spoken about that possibility.

Jacob said...


what you're saying is largely true. The U.S. is increasingly starting to look like Japan in the 90s. For over a year, the banks have desperately been trying to hide their bad assets, which is something the banks in Japan managed to do for a decade. If they were exposed, we would know for sure that the banks have several times their market value in bad assets. It was not until this happened in Japan that the crisis could be resolved.

In the U.S. it's getting worse every day. The crises in Sweden and Japan were almost identical to the U.S. crisis: they all involved huge amounts of bad debts, off banks's balance sheets, relating to complicated real estate speculation.

Saying that this crisis has no precedent is nonsense. We know how it came about and how it can be resolved. Up until now, the U.S. has done almost exactly what Japan did, and that certainly didn't work, and prolonged and worsened the crisis significantly. The U.S. has done none of what Sweden did, which did work.

Sweden is being described in the media as some kind of communist enterprise. That is hardly the truth. Sweden has a conservative government, as it did during the Swedish crisis. However, Sweden spends its tax money on free health care, free university education for all etc, instead of military invasions.

Anonymous said...


I haven't heard you yet discuss this issue of consumer debt, which Lisa mentioned and which I have also mentioned.

Everyone is focused on the banks, but the again, the consumers....all the average joe's are reeling under enormous debts and why isn't obama addressing this issue?

People don't need credit. They need to be able to declare bankruptcy and wipe out their debts.

Jacob said...

Consumer debt is of course a big and sad problem for many people, as well as for the banks. But in that regard, The United States probably has the most generous legislation in the world. People can file for bankruptcy and get comparatively generous terms. It is difficult to get loans for a while, but it is a slap on the wrist compared to other countries.

To file for bankruptcy in Europe is a very unpleasant experience. In most cases, everything you own of substance must be sold before you can do it. You don't get to keep your car or your home. In Spain, banks will call your relatives, neighbors and friends and tell them that you are deeply in debt (which is quite bizarre and illegal in most other countries).