Regardless whether one agrees or disagrees with Paul Krugman’s op ed in today’s New York Times, it is hard to disagree with his agrgument that the the plan is largely a subsidization of banks and/or a low risk option for investors. What he fails to point out is that, because of his points, that it is a huge subsidy, banks ought to rush to sell as much as they can of their toxic paper. Without the low interest rate, non-recourse government loan (means that the government can’t go after the new investors for any more than the underlying assets), the assets would almost certainly sell at lower price levels. Krugman argues that this is a failure to recognize the loss. He probably is correct but such recognition won’t get capital flowing or move the process forward. This government/private investor investment is effectively another capital injection into the banks. What Krugman also fails to note is that the subsidy should help facilitate trading in the aftermarket for these assets, if for no other reasons than the fact that there will be an auction to determine value. If nothing else, and maybe only for today, the market seems to like the plan. This evidenced by a huge rally led by the financial sector. I am sure that even Prof Krugman agrees that it is hard to ‘fight the tape”.
http://www.nytimes.com/2009/03/23/opinion/23krugman.html?ref=opinion
http://krugman.blogs.nytimes.com/2009/03/23/geithner-plan-arithmetic/”>
Krugman fulminates about the “certain failure” of the Public Private Investment Partnership rolled out this morning yet fails to provide a convincing alternative that has a genuine chance of getting the private sector interested in acquiring these troubled assets. Seizing financial institutions a la the RTC and then selling assets to private sector investors won’t work in the abscence of frozen financing markets–a hurdle that didn’t have to be overcome in the early 90s. If Uncle Sam wants to provide seller financing, this alternative may have a chance. But in the process it’s possible that an inordinate amount of unnecessary carnage will ensue (along with many unintended negative consequences) if nationalization is allowed on a large scale.
Comment by SACH — March 23, 2009 @ 4:55 pm
Absolutely correct. While he may be correct in his valuation argument, it is a “Pyrrhic” intellectual victory that fails to get markets open. Market pros seem to see the merit of the plan as evidenced by today’s rally
Comment by bosox4 — March 23, 2009 @ 5:02 pm