[lbo-talk] Krugman on the $700B deal: thumbs down

Michael Pollak mpollak at panix.com
Sat Sep 20 22:19:35 PDT 2008


http://krugman.blogs.nytimes.com/2008/09/20/no-deal/

September 20, 2008, 4:46 pm

No deal

I hate to say this, but looking at the plan as leaked, I have to say no

deal. Not unless Treasury explains, very clearly, why this is supposed

to work, other than through having taxpayers pay premium prices for

lousy assets.

As I posted earlier today, it seems all too likely that a "fair price"

for mortgage-related assets will still leave much of the financial

sector in trouble. And there's nothing at all in the draft that says

what happens next; although I do notice that there's nothing in the

plan requiring Treasury to pay a fair market price. So is the plan to

pay premium prices to the most troubled institutions? Or is the hope

that restoring liquidity will magically make the problem go away?

Here's the thing: historically, financial system rescues have involved

seizing the troubled institutions and guaranteeing their debts; only

after that did the government try to repackage and sell their assets.

The feds took over S&Ls first, protecting their depositors, then

transferred their bad assets to the RTC. The Swedes took over troubled

banks, again protecting their depositors, before transferring their

assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore

confidence in the financial system -- that is, convince creditors of

troubled institutions that everything's OK -- simply by buying assets

off these institutions. This will only work if the prices Treasury pays

are much higher than current market prices; that, in turn, can only be

true either if this is mainly a liquidity problem -- which seems

doubtful -- or if Treasury is going to be paying a huge premium, in

effect throwing taxpayers' money at the financial world.

And there's no quid pro quo here -- nothing that gives taxpayers a

stake in the upside, nothing that ensures that the money is used to

stabilize the system rather than reward the undeserving.

I hope I'm wrong about this. But let me say it again: Treasury needs to

explain why this is supposed to work -- not try to panic Congress into

giving it a blank check. Otherwise, no deal.



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