Thursday, March 26, 2009

The Geithner Plan: Time Is Not on Our Side

Here is the short version of what Simon Johnson, Paul Krugman, Brad DeLong and Mark Thoma said in their discussion of Geithner’s PPIP: no one thinks it is likely to be adequate, Johnson/DeLong/Thoma express varying degrees of optimism that it can lay the political groundwork for more decisive action down the road, and Krugman fears the Obama administration is using up what remains of its political capital and will be unable to take any further action.

I was not asked, but that doesn’t mean I don’t have an opinion. I think these four worthies have all missed the main point: there is a hard limit to the financial resources we will be able to throw at economic recovery. At some point the apparently boundless desire of the world’s portfolios to engorge themselves on T-bills will come to a halt in the form of an interest rate spike and plunge in the dollar. Can I look you in the eye and tell you when this will be? No, at least not if I’m not wearing shades, but I am quite confident the limit is out there. We may hit it in a few weeks or another year or two, or maybe we will be lucky and some how apply a fix before reaching it, but the US is not exempt from the general principle that there is a limit to how much money can be borrowed or quantitatively eased into existence.

The problem with the Geithner plan, as with all other varieties of bailout largesse, is that it depletes our limited resources with no particular likelihood of success. I would ask everyone to consider what our situation will be if the dollar spigot is exhausted before the financial system is back in approximate working order. My candidate adjective: dire.

The alternative continues to be the same: invest public money in a good, new public bank. Make sure the economy has a working, well-capitalized, unencumbered financial infrastructure; then, if you want, sort through the legacy institutions and assets.


Anonymous said...

"mr. dorman, this is hapa from the nullville gazette, a quick question if i may.

"are you at all concerned at the possibility that unknown hundreds of billions of dollars of derivatives contracts could be triggered if the US feds make a move toward the transnat banks?"

Peter Dorman said...


1. I thought *I* lived in Nullville.

2. A principal argument for the good new (public) bank is that we don't have to hold ourselves (you and me) hostage to the overhang of legacy assets, including the derivatives.

3. As for the derivatives themselves, people who know much more than I do say that a systematic resolution would net out a large majority of their value. Ad hoc approaches (using bailout funds to make good on these contracts a few at a time) can actually impede resolution. said...

Given that the Chinese seem to be becoming increasingly unhappy about lending massive amounts of money to the US, we may well be in the unpleasant situation where on the one hand the stimpack may not be big enough, but on the other, we cannot afford the one we have. Ugh.

Anonymous said...

hoh, a very pleasing answer, t-y.

in-re china: if i were in charge of a 1.x-billion-person factory, i would not be upset to lend, but that my loan was buying penthouse yachts instead of future consumers. wall street is eating the dollar ecosystem.…

Jack said...

It is not clear to me whether or not a bank with questionable assets to sell within this PPIP program is clearly blocked in some way from repurchasing its own assets at inflated values with the Public (85%) partner suffering the only likelihood of significant loss. If a financial product has a face value of $100,000 and a more likely value of $30,000, can Bank A or its subsidiary(or friendly competitor/cohort) buy that product for $60,000 putting only $9,000 at risk. What mechanism prevents the Private partner from over bidding and wasting yet more government funds?

utopia or bust said...

"The Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt,"

- Krugman

Ridding the system of $1 trillion in bad assets is 10% of the national debt. I cannot believe they think it's going to work.

Oh well, yay for when capitalism falls.