The Geithner-Summers Plan Is Worse Than You Think

The Geithner-And-Summers Plan (GASP) to buy toxic assets from the banks is rightly scorned as an unnecessary give-away by virtually every independent economist who has looked at it.  Its only friends are the Wall Street firms it is designed to bail out. In an earlier article, one of us (Sachs, FT, March 23) described the systematic overbidding entailed by the proposal.  Others have since made similar calculations, including Joseph Stiglitz (NYT, April 1) and Peyton Young (FT, April 1).  The situation is even worse that it looks, however, since the GASP can be gamed by the banks that own the toxic assets to boost the purchase prices for their bad assets even higher than has been suggested to date.

Finally, system-risk insurance

As we advocated two months back (Bagehot plus RFC: The Right Financial Fix), Uncle Sam is finally starting to sell systematic risk insurance on high-grade securities in exchange for preferred stock. This is a critical function for the US government; Uncle Sam is the only player capable of hedging systemic risk because he’s the only player capable of taking actions that keep the overall economic system on the right course.

Recapitalizing the Banks is Not Enough

The infusions of equity in a score or so of major banks in the U.S., UK, and EMU will help prevent a deep and prolonged world-wide recession.  So will the Fed’s new Money Market Investor Funding facility, which supports unsecured short term borrowing by top-rated financial institutions.  But these steps won’t help most banks to get back to their main job — lending to households and businesses. 

Running a National Sale

The demise of financial titans and the incessant warnings of economic Armageddon have unleashed a tidal wave of asset sales across the globe, eviscerating trillions in personal wealth. Stock prices are now low enough to bring back some buyers, but the contest between fear and greed remains undecided.

The same defensive mentality that allowed the sale of equities at fire sale prices threatens to cause a sharp drop in consumer spending, which accounts for 72 percent of U.S. GDP.  If this happens, the economy will slide into deep recession.

Disaster insurance is the answer

So now Uncle Sam has an additional $700 billion to work with.  Will it be enough?  It depends on what he does with the money. The original idea was to buy assets outright, $700 billion worth and then we’re done.  But the debate has moved on, and today’s idea seems to be to use the […]

Paulson Plan Compared with Kotlikoff-Mehrling Plan

Three possible pricing structures can be contemplated: distress prices (current), support prices, and normal prices (pre and post crisis). The table below shows the relationship between the price paid for the bond under the Paulson Plan and the price paid for the insurance under KM. In each case, the two prices add to 100. The […]