More information about the feds response to the financial crisis has been released, and Paul Krugman says it’s a bad plan (emphasis added).
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.
With truly extraordinary speed, opinion has swung behind the radical idea that the government should commit hundreds of billions in taxpayer money to purchasing dud loans from banks that aren’t actually insolvent. As recently as a week ago, no public official had even mentioned this option. Now the Treasury, the Fed and congressional leaders are promising its enactment within days. The scheme has gone from invisibility to inevitability in the blink of an eye. This is extremely dangerous.
The plan is being marketed under false pretenses. Supporters have invoked the shining success of the Resolution Trust Corporation as justification and precedent. But the RTC, which was created in 1989 to clean up the wreckage of the savings-and-loan crisis, bears little resemblance to what is being contemplated now. The RTC collected and eventually sold off loans made by thrifts that had gone bust. The administration proposes to buy up bad loans before the lenders go bust. This difference raises several questions.
You can read the rest of the column for the questions.
As I understand it, the economic pundit guys had thought the feds would come up with a plan by which the taxpayers would get some value back eventually. Plan B pretty much guarantees we won’t. And why do I think the White House is pushing Plan B with all it’s got?
Speaking of which: The White House released a statement on “The Administration’s Unheeded Warnings About the Systemic Risk Posed by the GSEs [government-sponsored enterprises].” The Administration wants us to know that it saw the financial crisis coming. Yes, and we all appreciate the visible, robust and tireless efforts of President Bush to prevent the financial crisis … oh, wait …
I dimly remember that last Wednesday, John McCain blamed the financial crisis on overcompensated executives and their “golden parachutes.” The Dems tried to inject some language about compensation caps into Plan B, and Treasury Secretary Paulson rejected it as a “poison pill.” Let’s see if McCain has anything to say about that.
Some Dems also are trying to get some help for homeowners into Plan B. I’m not holding my breath.
Finally, if anyone wants to reflect on whatever Jeff G. is ranting about here, be my guest. It looks as if his hatred and resentment of all things “progressive” is overriding any concern he might have for, you know, the financial crisis, which somehow must be liberals’ fault.
Update: Sorry, I left out the link to Jeff G.