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.