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Links roundup: Geithner tries to build a better mousetrap

Treasury Secretary Tim Geithner, at long last, is announcing his toxic-asset purchase plan this morning. The gist of it is that the government will loan private investors up to 95 percent of the price, and guarantee them against downside losses. It's essentially a more complicated version of the plan that then-Treasury Secretary Hank Paulson considered and then backed away from last fall.

Paul Krugman writes:

The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff....

But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

This is Rube Goldberg economics.

More toxic asset links:

WSJ: Geithner banks on private cash
NYT: Toxic asset plan foresees big subsidies for investors
Krugman (blog): Despair over financial policy
NYT: U.S. rounding up investors to buy bad assets

Also, check out this must-see photo essay, "Scenes from the recession," at the Boston Globe website.

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Comments (1)

In 1932 the Banksters put together a similar Geithner Fund called "Stars and Stripes Forever". This hoax was, and is, built on propping up Zombie Banks like: Citibank, Wells Fargo, JP Morgan, and Bank of America (which should be called DOA). The funds were/are supposed to prop up worthless investments: in the 1920's, National City Bank employed 1900 bond salesmen to push worthless bonds from various countries like Mexico and Hungary.

35 banks pumped $100 million into The "Stars and Stripes Forever" Bond fund to buy these worthless assets at inflated prices from investors. Needless to say, it failed, as will the Geithner Fund.

These Banksters should be taken over by the FDIC in bankruptcy receivership, and the healthy portion of their banks should remain open to the public during standard reorganization. Trillions of derivative contracts should be abrogated as failing the test of Glass-Steagall law, which should be readopted as emergency measure by Congress.

President Obama: fire Summers, and give Geithner a clerk position in the Treasury Department, and assign him to read Alexander Hamilton's Report on Manufactures and Report on Credit, and the Larouche Homeowners and Bank Protection Act.

Congress adopted Glass Steagall in 1933 after the Pecora Commission skewered JP Morgan for not paying income taxes in 1930 - 1932. The new law broke up Morgan bank into several pieces in 1935.