[WaPo Elitist Update & TV Must-Watch] Let’s Check Timmy’s “Toxic Assets” Plan

PAUL KRUGMAN is on PBS’s Charlie Rose tonight. Check your local PBS listings. Full show list: Nandan Nilekani and Thomas L. Friedman; An update on the economy
with Andrew Ross Sorkin, Joe Nocera and Paul Krugman; and The economy continued
with Thomas F. Steyer and Daniel Alpert on Mar 23, 2009.

Update: Steve “Let’s Put Down the Pitchforks” Pearlstein, the cheerleader business columnist for the Washington Post, was on MSNBC with Andrea Mitchell (1 p.m. ET hour). Ms. Mitchell quoted Paul Krugman’s “hot” column (quoted extensively below the fold) out of context:

The plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. … But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

Mr. Pearlstein, harummmph, declared Paul Krugman [photo right] “FLAT-OUT WRONG!” He shouted, “There is a risk. … Obviously, [Paul Krugman] didn’t understand the plan, or he didn’t read it very carefully.” Well, there you have it! Hank Paulson’s recycled plan is hunky-dory!

Original: Timmy Geithner’s WSJ op-ed, “My Plan for Bad Bank Assets” — uh, shouldn’t that have properly been worded as the “Obama administration’s plan”? (or is the slippery Obama keeping his name out of it?) — has been dissected by dozens of blogs and news organizations, with all the articles captured by the indispensable Memeorandum.com. However, as Memeorandum.com‘s list of related articles also makes clear, those troubled deeply by Geithner’s plan include the latest Nobel laureate in Economics, Paul Krugman, who wrote “Financial Policy Despair” for the New York Times:

… Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.

This is more than disappointing. In fact, it fills me with a sense of despair.

Here’s more Paul, and it’s sickening:

After all, we’ve just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldn’t do anything, and anyway it was someone else’s fault. Meanwhile, the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.

And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.

It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

Let’s talk for a moment about the economics of the situation.

Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.

As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

That’s what Sweden did in the early 1990s. It’s also what we ourselves did after the savings and loan debacle of the Reagan years. And there’s no reason we can’t do the same thing now.

But the Obama administration, like the Bush administration, apparently wants an easier way out. The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

SO! TIMMY! You do NOT have a new plan. You have the same recycled “junk” ideas that failed before.

It gets worse:

The likely cost to taxpayers aside, there’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive.

Susan’s Note to Paul: Paul, it’s not obsessive. It’s “sleight of hand” politics, the only kind that Obama knows. Paul, just remember that Obama only cares about campaigning and winning — and NOTHING ELSE. Then it all makes sense, Paul.

Paul, you also need to remember that Mssr. Geithner is an anti-regulation extremist, as I pointed out in my Friday story, towards the end, comparing him to the execrable Alan Greenspan.

See “The Cover-Up By “All The President’s Men” (and Sen. Dodd),” and scroll down to the section comparing Geithner to Greenspan. That article quotes Brooksley Born, the former head of the Commodity Futures Trading Commission, whose portrait graces the cover of my Stanford alumni magazine. Ms. Born — like Eliot Spitzer on Sunday — warns against the no-regulation extremists! Since you can’t see that article, unless you’re alumni, I am going to reprint it in full later tonight.

Paul, you need to keep at the forefront these key facts, and you will comprehend it all:

1. Barack Obama — and his two top advisers Rahm Emanuel and David Axelrod — solely care about politics, and they solely care about campaigning, getting donations, and winning.
2. Obama, Emanuel and Axelrod do not care about governance or government policy. That’s all annoying “work” that they aren’t interested in doing. Obama will talk about policy but only if there’s a teleprompter in front of him and he can read a speech written by someone else.
3. Timmy Geithner is an anti-regulation extremist who oversaw the failures of A.I.G., Merrill Lynch, and much more as head of the New York Fed. Geithner, in concert with Hank Paulson, created the A.I.G. bail-out.

Again, see Eliot Spitzer for the REAL story — i.e., that there was NO OVERSIGHT by the Fed, by the S.E.C., or any other regulatory group. And, by the way, Spitzer points out that we already have ALL the laws we need to catch up with these runaway trains that are set to mow us all down into national bankruptcy and hyperinflation.

PAUL KRUGMAN AGAIN:

But the real problem with this plan is that it won’t work. … READ ALL.

Surprise, surprise. That’s because our real “toxic assets” are Barack Obama, Rahm Emanuel, David Axelrod, and Timmy Geithner.

Really, gang. You must READ ALL of Krugman’s despairing column. I am not permitted, ethically, to quote it all.

So we have a recycled plan — nothing new about it — that won’t work, that is guaranteed not to work because it’s already been proven to fail before.

NOW IT’S YOUR TURN!