Joe the Nobel Prize-winner

Though Joe Stiglitz misses the biggest threat to taxpayers from the latest Geithner plan, he still argues convincingly against the plan’s massive taxpayer subsidies to “buyers”:

The administration’s plan is [supposedly] based on letting the market determine the prices of the banks’ “toxic assets”… The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets…

The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, …they primarily “value” their potential gains. This is exactly the same as being given an option.

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses…

Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan…

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other…

So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets.

Posted by James on Wednesday, April 01, 2009