The Good Side of Geithner's Plan: 'Price Discovery'

We have another new Treasury program. The mechanics are best understood through the examples offered by the treasury (full details here), which describe a loan program and a securities program.

The best independent commentary is at Brad DeLong's blog.

My evaluation of the new treasury plan: It's not what I would have done--I'm not convinced that we need this, rather than more reasonable behavior by bank examiners in the field (as I've written about here). But here's what I like about it: the private sector actions set the price of the assets. We economists call this "price discovery," and the Treasury's use of this phrase demonstrates that they have listened to an economist, something many Treasury secretaries never have done. Leveraging public money with private money is a good idea (if you're going to use public money at all).

However, Secretary Geithner's plan after plan after plan reminds me of the gardener who planted an apple seed. The next day, he was surprised that he had no apple tree. So he watered the yard. The following day he was surprised that he still had no apple tree, so he fertilized the spot where he had planted his seed. The next day, surprised again, he ran water for half the day. The following day, surprised, disappointed and angry, he dumped a 50 gallon drum of fertilizer over the ground that had the apple seed. He never got an apple tree from his seed. He became a socialist.

Comments

[Steven Hansen:]

i suspect this plan was generated for the stock market - not because it was really needed. look at the lift in stock prices. it is another bailout where big business wins over the taxpayer.

Mar 24 04:50 AM

[huskerbob:]

We who are not economists like to call this distorted price discovery. We are giving the private sector cheap money to use as leverage, much like the earlier price distortions (bubbles) caused in real estate, commodities, etc. The price discovered will be different than if the investors were risking only their own money. So is it truly price discovery?
If you think trying to reinflate a bubble is a good idea, then I can see why you like the plan.

Mar 24 06:49 AM

[Chezfrederick:]

I am amazed that Geitner felt it necessary for taxpayers to shoulder in excess of 92% of the risk to entice private investors to buy into bank toxic assets... In effect this ends being another bank handout with taxpayer funds, couched by the screen of minimal private investment.

He now has an excuse of "Market Pricing" should these transactions end up being unprofitable and the goverment ends up with all the risk. Further, the cheap financing, the leaverage as well as the assumption of all the downside risk means that the plan will entice private investors, and encourage them to be overly generous in the pricing of these assets... Winners... private investors, the Banks, the market. Loosers... the taxpayer... Whoever said that the administration is not pro market???

I would have prederred an outright buy out of these assets by the goverment, with pricing advice from proffessionals. At least it would have given taxpayers an even chance at the whole upside, and downside. Alternatively, entice private investors who are willing to share the risk 50/50 with taxpayers, without giving them any additional downside protection.

This program is a give away....

Mar 24 07:25 AM