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March 23rd, 2009
09:12 PM ET

The Geithner plan just might work

Editor's note: Debate is raging among economists over Treasury Secretary Tim Geithner's plan to sell toxic assets with taxpayer support. Nobel laureate Paul Krugman of the NY Times says the plan "won't work." Here's Brad deLong of UC Berkeley on why he thinks it could succeed.

Grasping Reality with Both Hands
Brad DeLong

Q: What is the Geithner Plan?

A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off–in either case at an immense profit.

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?

A: Then we have worse things to worry about than government losses on TARP-program money–for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

Q: Where does the trillion dollars come from?

A: $150 billion comes from the TARP in the form of equity, $820 billion from the FDIC in the form of debt, and $30 billion from the hedge fund and pension fund managers who will be hired to make the investments and run the program's operations.

Read more...


Filed under: Economy
soundoff (24 Responses)
  1. Neo

    Can someone @ CNN give an example of an undervalued asset?

    "... the Treasury is doing this to make money?
    A: No: making money is a sidelight. The Treasury is doing this to reduce unemployment." Q: How does having the U.S. government invest $1 trillion in the world's largest hedge fund operations reduce unemployment? A: At the moment, those businesses that ought to be expanding and hiring cannot profitably expand and hire because the terms on which they can finance expansion are so lousy....."

    This sounds AIGist, just wrapped up in a co-share plan. How come the gov't doesn't give the money directly to the company? Why are they giving this to the private investor? Is it because the GOV'T won't get a return if it's done the other way around? And then the Dow raises 500 some odd points yesterday b/c now everyone has money in their pockets to spend whereever they want or directly to undervalued assets? Giving money to re-invest in the market is fine. Giving them to companies that once again seem unsustainable makes me worried about this plan. (In this article it said "probably fundamentally undervalued assets". Probably? Do they feel if they give money willy-nilly to a private investor that they might get back-lash?

    March 24, 2009 at 8:12 am |
  2. Matt

    Sorry, Brad. Not buying it!

    March 24, 2009 at 5:13 am |
  3. Richard Russell

    This plan still does nothing to help the people. It only helps the financial institutions. Let us help everyone. Take the Trillions and actually pay down all mortgage balances. Don't "buy" the paper, pay down the principle. The lenders still get "cash", The lenders get improved equity, the mortgage holders also get equity so they can refinance etc. This would help everyone

    March 24, 2009 at 5:12 am |
  4. Cliff John (Lynnwood, WA)

    President Obama & Co., including Geithner, have been in office just over a couple of months. With the huge economic problem that they inherited, they may need more time. Let's all back off. It is unfair to ask questions and speculate given the short period of time. Solving this bad economy is not an overnight process.

    .....and for the media, back off also.

    March 24, 2009 at 3:18 am |
  5. Melanie

    hello,
    Why is the Gov, robbing the poor and giving it to the rich?
    I thought Robin Hood robbed the rich and give to the poor, guess not
    in Amercia.

    March 24, 2009 at 2:33 am |
  6. Wade Pascoe

    You call it "toxic asset" bailout, yet when pushed it is described as bad mortgages made by the banks. You are misleading the people – call it what it is. It is bad loans made by greedy bankers.

    Next – are these the homes that people have been pushed into the streets from? If so then the bank holds the property and intends to resell it – likely at a lower price then the previous mortgage. It will sell at the new market value – a value created by who? The banks of course.

    So we now have cheaper homes on the market and people wanting to buy but the bank will not let them cause they defaulted earlier. This is wrong – the banks greed created the problem, now you give money to the bank to assist those who managed to maintain reasonable standing with the bank. Those the bank screwed giving bad mortgages to in the beginning are likely screwed for life as credit risk by the very system that created the problem.

    You have not solved any problem, you have whitewashed it and will allow it to create future issues. In the mean time those at the top demand protection from their stupid decisions and get that protection from government, police and the media. Why are these people not facing fraud charges and/or being fired for gross mis-management?

    An outsiders view from Canada. Anderson – you say your keeping them honest but your a part of the coverup calling it "toxic". This diverts attention from the true facts and misleads.

    March 24, 2009 at 1:54 am |
  7. Don Magnifico

    What next, are we going to the world social security accounts? We, the US already are the worlds largest hedge fund investors, in other words suckers. How long will our tax dollars be invested in failing markets. Get back to fundamentals and mandate your bookkeepers.The numbers do not lie, people that write them do.

    March 24, 2009 at 12:48 am |
  8. John Boynton

    I am glad to see a plan put forward to deal with the toxic assets. However, with 95% government and a good chance that toxic assets will be sold well below their ultimate value, I think there is a chance that the private investors who step in now will make boat loads of money and trigger massive outpourings of negative public opinion. I don't have a problem with this, personally, as those investors are taking big risks and deserve commensurate returns. But be ready for the blowback 12-24 months from now.

    March 24, 2009 at 12:36 am |
  9. Vi, WA

    This plan sounds much better than just giving bail out $ to dying companies. Host of a monopoly party win most of the time. Politicians need not to argue whether it works or not since there is not much difference between $1 trillion and $10 trillion deficit. If they don't have counter-proposal, please don't criticize for the sake of politics.

    March 23, 2009 at 11:56 pm |
  10. Frank

    I think the government should give out to all the taxpayers in the USA, $ 300,000 per family so we can revive the economy. By purchasing homes, cars and openning up new bank accounts, CD's, Money Markets and so on. We the people of the United States of America should be the ones to revive our economy, If we can receive monies from our government.

    Thank you,

    Frank

    March 23, 2009 at 11:34 pm |
  11. Jack from CT

    I'ld like to know how the Geitner plan will effect AIG. If the private/government investors take the toxic assets off the bank's balance sheet at a discount, doesn't AIG then have to cough up the difference or post the collateral back to the banks for the reduced value that these assets were sold for???

    March 23, 2009 at 11:21 pm |
  12. Thomas

    Sounds great, but no thanks. If the program works, everyone is happy. If it doesn't work, private investors and banks are happy because the government will guarantee the loan, which means the taxpayer loses. Why is the taxpayer assuming so much risk if the program fails, but only shares half the profit if it works? This is just another round about way to help the rich get richer... Love the change Obama.

    March 23, 2009 at 11:11 pm |
  13. KIm

    However, they all have to pass the "maddening hell vetting." Kick that money printing press ... US Treasury,rally's at last ! It's a song and dance !

    March 23, 2009 at 11:06 pm |
  14. Sherry, N. Calif.

    They are still not fixing the failed system that caused this mess. They can throw trilllions to Wall St. and wherever else they want to throw it. Won't help! Fix the failing system, not the causes. Enough with the band-aids the Patient is dying you idiots!

    March 23, 2009 at 10:21 pm |
  15. Jackie -Santa Maria

    They better drag out the best teleprompters for tomorrow night's speech – and don't forget – make sure whoever loads the speech puts the right one in! I can't help it – I am SO TIRED of the word TRILLION I could puke!

    March 23, 2009 at 10:11 pm |
  16. Pat Tibbs

    We have to get private sources to put some skin in this game. I figure this plan is worth a shot.

    March 23, 2009 at 10:08 pm |
  17. Rose Robinson

    I pray his plan will work. I recognize he has a lot on his plate, alot of left overs from Bush. If we allow him and our President to do their jobs. Who know's we just might see some light at the end of the tunnel, light moving us in the right direction. The republican's are a distraction whom should be ignored, If you can't be part of the solution, SHUTTTTT UP.

    March 23, 2009 at 10:04 pm |
  18. RIch Pretty Girl

    Ok, I don't really understand all this. But when I was a kid I went to my friends summer home in London and it was more like a mansion with it's own ballroom and I thought it was really cool until he said the Queen owned it and they had to keep it up for her as she demands. What?! So, where I'm going with this is what if the government starts owning everything. Our government is not so good at managing things for example AIG. Personlly, if I gave out billions I would look over the accounting and where it was being handed out, but the government doesn't have a CPA system to oversee that. What about the billions of dollars over Baghdad that had no accounting for it. They were just handing out money in military bags to people who were contracted over there; not even receipts given. I'm not sure this is so good.... maybe I don't understand completely yet how this is all going to work out. Anyways, it's always easier to spend someone elses money and when you do there is usually little accountability.... is this the same just different scenario?

    March 23, 2009 at 9:58 pm |
  19. Martin

    If the stock market continues to rebound like it has for the past few days, these actions by President Obama, may indeed be working!!

    March 23, 2009 at 9:54 pm |
  20. Martin

    I think it's a great idea, but it has to be stipulated that if the Government removes these toxic assets from the banks, the banks in turn will have to start loaning money, but in a responsible way.

    March 23, 2009 at 9:53 pm |
  21. John

    It shows glimpses of promise but I'm getting more and more worried with every number followed by a "billion"

    March 23, 2009 at 9:51 pm |
  22. Charles

    I have just about come to the conclusion that the cable networks are doing the American people a real disservice...The promotion of fear and distrust to sell product and revenue has overshadowed the need for the emotional stability of the American family....For weeks the Secretary of the Treasury has been used by networks to raise the issue of the country's economic stability... a real marketing tool for cable...more conflicting views the higher the ratings.
    Todays poll shows Geitner with a fairly substantial approval rating and yet .. before all the information was presented the doubt of America's future rested in the minds of cable TV, its host and guests. Cable TV has reached the point of feeding on itself...... Very much like AIG.. too big to fail.

    March 23, 2009 at 9:48 pm |
  23. Jackie -Santa Maria

    Why commit trillions more hoping for the best? PAY OFF everyone in the country's mortgage. Much less than 3 trillion. With the money evreyone will now have to spend – it will boost the economy – when everyone files their taxes, they won't have a mortgage deduction because their homes are paid off – that means more revenues for Uncle Sam. It is a WIN-WIN situation!

    March 23, 2009 at 9:44 pm |
  24. chris

    It's truly a disapointment to see the fed. govt. fall into the gambling trap of investing taxpayers dollars and futures in a speculative market. Throwing money at the banks again will hopfully begin the financual revolution. Without a secure tax base , the plan will fail. Our economy is consumer driven, feed the consumer and the economy will survive. Anything less and it will fail, forever.

    March 23, 2009 at 9:35 pm |