Krugman doesn’t think much of the latest Geithner plan. Surprise, surprise.
Notice that the government equity stake doesn’t matter — the calculation is the same whether private investors put up all or only part of the equity. It’s the loan that provides the subsidy.
And in this example it’s a large subsidy — 30 percent.
We are sort of puzzled, however, that he hasn’t fixated more on the effect the plan, and the inflated marks it could create, will have on related assets that are stuck in mark-to-market mode, and that this may be the Treasury’s real goal. After all, imagine the multiplier the Treasury is getting this way. Consider:
Agency and non-agency mortgage backed securities outstanding were about $7.5 trillion in late 2008. If a mere 10% of these are currently afflicted with the evils of mark-to-market accounting because they have become Level III assets (we can’t help but think of Schedule III narcotics whenever we see that), the Treasury is in a position here to buoy up marks on $750 billion in assets with the use of $50 billion in capital. (Assuming half the $100 billion PPIP program is used on the Securities rather than the Legacy Loan side of the problem and that the figure stays at $100 billion for the entire program). Plug in your own figure for the amount of subsidy you think the Fed’s leverage is putting on the marks and do your own calculation as to the effects.
We think the plan is just re-inflation (and we bet the Administration really wishes Krugman would shut up about this subsidy stuff) but at least it seems it might be effective re-inflation.
Geithner plan arithmetic [The New York Times]
Give me back my Filet-O-Fish!! Give me that Fish!!
watching krugman and geithner argue is like watching a footrace at the special olympics
Still waiting for the Kirk/KRUG-MAN picture that should accompany any post referencing the (other) Beard
@2-3 Is that you Barack?
i am glad krugman is an equal opportunity pain in the ass.
“but at least it seems it might be effective re-inflation.”
EP, Was that a compliment?
-Timmay
Leverage makes a good trade great and a bad trade suicidal.
Geithner is turning the Treasury/FDIC into a giant leveraged hedge fund with independent traders putting on the positions.
Can anyone tell me if they really think that the banks are undervaluing the assets on their books?
It is obvious how this ends.
I think Dealbreaker should sponsor a Mad Max film festival in Bryant Park with free booze.
@ 5 – yes it was me. my teleprompter head butted me after my posts. sorry i didnt answer right away
TP says I can’t even post on message boards without him
@8 – except Treasury/Fed/FDIC and their hedge fund buddies are buying in after the crash, have a very low cost of capital, and control inflation.
Krugman’s alternative seems to be guaranteeing all banks and seizing the big ones. So he wants socialism.
Did Krugman donate his Nobel money or did he keep it for himself? Can we institute a 90% tax on Nobel prizes? I mean, these “scientists” are merely products of the heavily-subsidized US educational system. Doesn’t the taxpayer deserve a fair cut of that money?
After reading that, it amazes me that the guys won a Nobel Prize. His math excludes interest on the security and loans, and risk free alternatives for investors. Man, what a frickin’ dope.
@11. This is #8.
We already have half-socialism (privatized gains/socialized losses). Uncle Ben already guaranteed the tobigtofail banks on 60 minutes.
Are you willing to bet the future of the United States on the crash being over?
Um….Enrico Fermi Prize winner at #11….
The Nobel Prize money comes from Sweden.
How are things at Texas A&M this time of year? I bet the wildflowers are blooming at College Station.
@13 – do you think the US would survive the collapse of the private banking system?
My bet is that we aren’t far from the precipice and that if we don’t shore up the banks now, it will be a lot more costly later.
How much does Krugman think it will cost to guarantee all bank deposits and clean up the big banks post-seizure?
Will the morality imparted by wiping out the greedy, bastard common shareholder be worth that cost? Because I know a lot of nasty index fund investors who piled in to the Vanguard 500 fund because they thought they’d make big money on Citibank’s subprime exposure and the ensuing government bailout.
It’s a PIP.
@2/3 – you wouldn’t qualify for a footrace at the special olympics.
@13.
I agree that the private banks should be supported to protect the overall economy as well as the “going concern” value of those institutions. The Lehman bankruptcy created dead-loss because the “going concern” value of Lehamn was destroyed to the extent it was not absorbed by Barclays.
However, I believe that the shareholders and bondholders should be first in taking the losses and not receive a windfall payment from the government. This at the heart of the free enterprise system of risk and reward.
Right now we have free options all over the place.
Divide each “legacy bank” in half (a good bank with enterprise value and a bad bank to hold the toxic assets) and give the bondholders equity in the bad bank and bonds (with smaller face values) in the good bank. The bad bank will simply operate to runoff the toxic assets and its capital structure will be only equity. In essence, the bondholders get a call option on the toxic assets and a bond from a healthy bank in return for the haircut. The legacy banks are worth more in pieces than they are worth whole because the toxic assets are imparing the enterprise value (which is significant) of the entire legacy bank. I believe Citi is already trying to do this. Maybe they just need a small push from Treasury.
well said, 18. all these plans are basically saving the equity holders (let alone the debt holders) of the big banks, at the expense of the tax payer. misdirect some bonus outrage at AIG and it can be pulled off.
Hussman has been saying it forever – protect counterparties and customers and let the bondholders and stock holders suffer.
@ 17 – nice comeback. tell mom to pay the AOL bill
“For, whoever gives advice (unless he is bound by close fidelity or ties of affection to the one seeking advice) not only is moved largely by self-interest, but also by his own small advantages and by every slight satisfaction, and often aims his counsel toward that end which turns more to his advantage or is more suitable for his purposes; and since these ends are usually unknown to the person seeking advice, he is not aware, unless he is wise, of the faithlessness of the counsel.”
-Francesco Guicciardini (1537) (translated from Italian)
Mankiw seems to like the plan, as he says it closely resembles his own proposal. Mankiw’s not one of those “mainstream” economists like Krugman who hates free markets and refuses to acknowledge trickle down effects. But you know, take what you can get.
They could just relax capital requirements for Citi and BofA. That wouldn’t cost anything.
gee-yaaaah, has stupidity taken over? Sure seems like it has, if people think this plan has any merit other than debasing the currency. So, the govt finances 97% of a trade to buy assets which are eventually being written down to zero once the underlying loans are liquidated. It means that my $3 is going to zero, a 100% loss. Duh. Liddy knows it, Pandit may have a clue, but I am not going there with my money nor anyone else’s. The plan is to sell the impending fail retail, as in taxpayer retail, since the pols in charge of taxpayer are the buyers of last resort.
Trusting Mankiw’s opinion is a wonderful idea. After all his track record under Bush was absolutely stellar.
8 and 13 are the winners.
since they are the same guy, only 1 trophy is needed.
gm bonholders are taking a 70% hit but bank bondholders are riding the A-train with Spitzer’s hooker.
shitake.
taxpayers are fucked. obama and geithner are owned by c, gs, bac and jamie