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