A Response to the Geithner Financial Rescue Plan

Brief notes on the Geithner Financial Rescue Plan:

1. Called the Geithner Plan, not the Obama Plan--distancing of the president from the proposal.

2. Reinforced by Axelrod leaks to Labaton and Andrews painting Geithner as the Wall Street loving holdover--and this the person to take the blame if things go south.

3. This is not new money--this is only the second half of the TARP from last fall: $350B.

4. It is an attempt to leverage the TARP money--via the Fed and the private sector--as much as possible.

5. As the Fed takes on tail risk and buys up risky assets, the supply of assets the private sector must hold declines and their prices will rise.

6. As public and private money flows into the banks, their risk tolerance will grow and they will bid up risky asset prices as well.

7. The net effect might be that fears that banks are insolvent or will become illiquid will ebb.

8. And the financial crisis and the Bush depression will come to an end.

9. But Geithner said this is not the end--that if the TARP money is expended and if banks still fail their stress tests, then what...

10. This plan does not foreclose a resort to the Swedish model, it is instead an attempt to use the TARP money to escape the necessity for adopting the Swedish model.

Comments

[Robert H. H...:]

Good summary, but I fear steps 4-8 are exactly what the Treasury hoped would happen with the first $350 million of TARP funds when they were announced back in October.

No government official will admit this (until they publish their memoirs) but I believe that TARP 1.0 (buying "troubled" assets) was largely based on the hope that its announcement alone — with the promise of government supplied liquidity to frozen credit markets — would encourage private institutions to close bid-​ask spreads in the debt markets and get the markets moving. If, as many hoped, the immediate problem was illiquidity rather than impairment the mere promise of a buyer might thaw the markets (read: "increase bids so that unrealized losses could be recovered or avoided") and the government might not have to spend the TARP money at all. Or at the very least, a revived market in distressed debt securities would allow the Treasury to buy assets at fair market values which could later be resold without appearing to be a taxpayer handout.

As the New York Times reported it on October 3, 2008:

“The rescue plan allows the Treasury to buy troubled
securities from financial firms in an effort to ease a
deepening credit crisis that is choking off business
and consumer loans, the lifeblood of the economy,
and contributing to a string of bank failures.”

“Officials say the final cost of the bailout will be far
less than $700 billion because the government will
resell the assets that it buys.”

As the economy has dramatically weakened since October, it seems even less likely today that the fundamental issue is one of illiquidity rather than permanent impairment of loans and possible insolvency of various financial institutions.

On to step 11.

Feb 12 02:01 PM