Tuesday, March 24, 2009

Geither's stealth bailout continues

No shortage of comments on Geither's latest PIPP plan. It's the same as the Paulson plan -- the Government covertly recapitalizes politically connected banks -- except that it is more deceptive and more expensive.

A while ago I argued that the cost of financing should not drive the price of an asset. Whether Amazon's stock is worth $100 should not depend on how good a margin deal by broker gives me. I was wrong, the price of assets can be entirely driven by financing costs, and this is doubly true for financial assets.

If banks acknowledged their losses, they would not be able to make their capital requirements, and under law (hah!) would need to be shut down by the FDIC. To avoid that fate, Geither is offering super cheap financing to leveraged buy out shops so they can buy those bank assets and create a price that will let the banks maintain the fiction of having adequate capital. This will be touted as a "market" solution to "price discovery" but it is no such thing. True price discovery does not involve sweetheart deals with the Treasury. And this is before you go into all the ways the "auction" will be manipulated, and all the agreements to make creditors whole should they "overpay" for the assets and make banks whole at a loss to themselves (and tax payers). Truly, it is the greatest transfer of money from workers to the hyper rich investor classes the world has ever seen.

Will it help the economy? No. The economy is deleveraging as it seeks a debt load that it can serve out of income. The Government is engineering high unemployment to keep pressure on real wages and benefit capital. I don't think the current stock market bounce will last, but I have been long financials.

Paul Krugman, who is causing nightmares in the Obama administration, is right:
We had vast excesses during the bubble years, and I don’t think we can fix the damage with the power of positive thinking plus a bit of financial engineering.
We could fix the problem by reducing fiscal drag through a payroll tax holiday, but, as Rahm Emmanual said, that would be a waste of a good crises.

Banks are procyclical. Fixing them will not fix the economy, but restoring aggregate demand will. All these interventions do it enrich already wealth bankers and leave fewer real goods and services for non-bankers. Brad DeLong is wrong, but by taking a stance opposite Krugman's, get's into the Grey Lady:
The purpose of the Geithner plan is to boost financial asset prices and so make it easier for businesses to obtain financing on terms that will allow them to expand and hire. The plan would take about $465 billion of government money, combine it with $35 billion of private-sector money, and use it to buy up risky financial assets.
Nope. Businesses will expand and hire when they see more demand. Higher financial asset prices will not help that, although it will keep Citi and BofA in existence.

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