That is, why it isn’t the solution it is touted to be. Jeffrey Sachs of the Financial Times:
The Geithner-Summers plan, officially called the public/private investment programme, is a thinly veiled attempt to transfer up to hundreds of billions of dollars of US taxpayer funds to the commercial banks, by buying toxic assets from the banks at far above their market value. It is dressed up as a market transaction but that is a fig-leaf, since the government will put in 90 per cent or more of the funds and the “price discovery” process is not genuine. It is no surprise that stock market capitalisation of the banks has risen about 50 per cent from the lows of two weeks ago. Taxpayers are the losers, even as they stand on the sidelines cheering the rise of the stock market. It is their money fuelling the rally, yet the banks are the beneficiaries.
If you’ve been wondering why the stock market had a short rally upon its announcement, there’s your explanation. You need to read the whole thing as Sachs uses a simple example to explain his point. He concludes with:
Tim Geithner, Treasury secretary, and Lawrence Summers, director of the White House national economic council, suspect that they cannot go back to Congress to fund their plan and so are raiding the Federal Reserve, the Federal Deposit Insurance Corporation and the remaining Tarp funds, hoping that there will be little public understanding and little or no congressional scrutiny. This is an inappropriate institutional use of the Fed, the FDIC and the Tarp. Mr Geithner and Mr Summers should at the very least explain the true risks of large losses by the government under their plan. Then, a properly informed Congress and public could decide whether to adopt this plan or some better alternative.
But, of course, we’re just in too big of a hurry and the situation is too dire to actually discuss and debate the situation or do it properly through Congressional action. Instead we’ve been sold a bill of goods which, disguised as a way out, is simply a rip off of the taxpayer – again. As Jennifer Rubin notes:
So to avoid the overwhelming popular objection to perpetual bailouts and expenditures, the Obama administration will do this all “off budget” and with no hearings, Congressional debates, or votes. Not very transparent and quite imperious, when you get right down to it.
Yeah, not very “hopey changey” is it?
I’m warming more and more to my suggestion that government officials be compensated the same way they think CEOs should be compensated. If this ends up being a big loss to the taxpayer, Geithner and Summers should receive zero compensation for the outcome. And that would also go for anyone else in the administration or Congress who had a hand in implementing this plan.