Geithner Explains His Plan

I call it “instant brain freeze.”

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

The Anonymous Liberal has a lucid and thoughtful post that addresses the concerns raised by Paul Krugman and other well-informed critics of the Geithner plan:

Treasury Secretary Tim Geithner has announced his long awaited bank rescue plan and the early reviews are less than glowing. No one seems to like it.

Under normal circumstances, I would take that as a sign that the plan is a pretty bad one. But these are not normal circumstances. The cacophony of criticism being leveled at the plan is somewhat deceptive in that much of it (i.e. nearly all of it coming from the right) is just Malkin-esque know-nothingism. The “tea party” crowd doesn’t have any idea how to solve the financial crisis, and they don’t really care either. They are either in serious denial about the magnitude of the problem or they realize that no one is listening to them anyway, so they might as well just be outraged by everything and let the adults make the hard decisions.

Over at the adult table, the primary criticism of the Geithner plan seems to be that it is unlikely to do enough to fix the problem, that nationalization of the banks is the only real solution we have left. Paul Krugman is firmly in this camp, as are a number of other intelligent economists with good track records on these issues. My sense from reading Krugman’s column and various posts about the Geithner plan, however, is that his primary concern is that if we adopt the Geithner plan–which he sees as unlikely to work–it will somehow foreclose any chance of pursuing a Swedish style nationalization plan down the road. …

I wouldn’t for a second presume to take issue with Krugman’s economic analysis (I’m just a lawyer), but to the extent his opinion is based on his assessment of the current political climate, I think he’s probably wrong. Saving the financial system isn’t like enacting health care reform. With something like health care, you may only get one shot. If the public sours on your idea, they have the status quo to fall back on and the odds are that nothing will get passed. But if the Geithner plan doesn’t work, the financial system is still going to need rescuing and nobody is going to be content to do nothing. …

Which brings me to the second flaw I see in Krugman’s analysis. Implicit in his criticism is the notion that nationalization (i.e. the Swedish model) is currently a politically viable option. I’m not at all sure that’s the case. Presumably Congress’s authorization would be required to embark on such an endeavor, and it’s hard to see how such a proposal would get through the Senate. It may be that, as a political matter, we need to try something along the lines of the Geithner plan before we take the next step.

Meanwhile, Glenn Greenwald looks at this issue in the context of the public anger it has generated.

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