Geithner plan jeered by economists; cheered by markets
Mar 23rd 2009 1:30PM
Updated Dec 4th 2009 11:25AM
Treasury Secretary Timothy Geithner's $1 trillion plan to encourage private companies to snap up toxic assets that are weighing-down the balance sheets of banks was greeted warmly by Wall Street, even as some economists raised questions about its effectiveness.
Investors who earlier complained about the lack of specificity about the Obama Administration's bank rescue plans got the detail they sought in one of the most complicated government plans announced in recent memory. Stock markets hailed the plan, sending the leading indexes up higher. Morgan Stanley called the program "innovative." Pimco's Bill Gross told CNBC that he thinks that investors have a "civic responsibility" to participate. BlackRock Inc. (BLK) also will participate in the program, the business channel said. A BlackRock spokeswoman could not immediately be reached. Goldman Sachs Group Inc. (GS) declined to comment.
"The partnership between public and private institutions is a great way to help restore liquidity in the market," said Steve Bartlett, CEO of the Financial Services Roundtable, said in a statement. "It is encouraging to see Treasury creating unique ways of stimulating the economy while protecting the taxpayer."
Protecting the taxpayer is the key issue facing the government's rescue of the financial services companies. There is no dispute that the assets -- mostly mortgage-backed securities -- are worth considerably less than they were initially purchased. Exactly how much less is open for debate. Some of these assets have been sold for about 30 cents on the dollar, a level so low that many banks are not bothering to sell.
In remarks to reporters, President Barack Obama said, "we still have a long way to go" before the credit markets become unfreezed. For critics such as economist Josh Bivens of the Economic Policy Institute, there is plenty of room for improvement in the Public-Private Investment Program.
"It is a well-disguised rehash of what was the original plan put forward by Paulson," said Bivens, referring to former Treasury Secretary Henry Paulson who originally proposed unloading toxic assets but changed his mind. "It is sort of shocking how little fundamental value" these assets have.
The incentives in the program, which uses $75 billion to $100 billion in federal fund to finance the purchase of the assets, will not solve the issue of figuring out the value of these assets. Bivens argues that taxpayers will be the big losers.
"Taxpayers are not going to be paying a price that reflects how lemony they are," he said. "We are almost going to surely going to overpay."
Bivens' statements were echoed by Dean Baker, co-director of the Center for Economic and Policy Research. He told Daily Finance that even with government subsidies, many banks may still be reluctant to do deals because the price remains poor.
"In terms of finding a market price, it does not seem to do it," said James Gattuso, senior fellow at the Heritage Foundation. " There are costs of getting it wrong, not the least of which is explaining to taxpayers why all their money went to hedge funds."
Writing in today's New York Times, Nobel laureate Paul Krugman argued that the plan allows investors to profit if asset values go up and walk away if they drop.
"So this isn't really about letting markets work. It's just an indirect, disguised way to subsidize purchases of bad assets," he said.