Hussman (and Toles) on Geithner's Toxic Menu

John Hussman weighs in on the latest emergency measures from the federal government (emphasis added in bold):

[F]rom early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount -- the remainder being "non-recourse" financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficiently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.

...

There is no doubt that the Fed also intends for the extra trillion in base money to end up as bank reserves. But think about what this move implies in equilibrium. The largest purchasers of U.S. Treasury bonds at present are foreign central banks. So what the Fed is really doing is printing enough money to crater the exchange value of the U.S. dollar, while leaving foreigners with a trillion dollars of savings that they would otherwise have invested in Treasury bonds, which they will now use, not to buy our lousy, toxic assets, but to acquire our productive assets, and at a steep discount thanks to the currency depreciation. So yes, the extra trillion in dollar bills will ultimately end up as bank reserves (and currency in circulation), but only by encouraging Beijing to go on a shopping spree to acquire a claim on our future production. Ultimately, funding the bailout of lousy assets comes at the cost of debasing our currency and selling our good assets to foreigners.

And for good measure, here's Tom Toles, who's all over this story...

Comments

[3 degrees o...:]

Geithner's plan is worse then bad.

I have to go puke now!

Mar 24 05:33 PM

[cynewulf:]

Toxic, Toxic, Toxic, Geithner. Why is Obama laughing so much?

Mar 24 05:51 PM

[Between The...:]

This is the mistake that the US made that China won't: when a country manipulates currency so that one (the $) is so much stronger than the other (yuan), the best thing to do is but the *productive* assets of the weak-currency country and then export the value add back. Instead, the US bought the worthless crap that spewed out of China's factories, leaving them with the productive capital and the extra US $ needed to buy the US's few remaining productive assets. Check out China's purchases of natural resources world-wide, and you can expect that there will be a play made on one of the mid-major oil cos (one was scuttled two years ago by politics).

Mar 24 06:17 PM