The New Republic

Why should the government financing change the market price of these assets?  In several posts in the past couple of days, mostly in response to raylward and GSspinks I think, I pointed out that the subsidy cannot change the price because it is a one-time deal available only to move the assets out of the banks.  As such, the subsidy goes into the pocket of the bank.  The "investor" will pay the market value, certainly not more, and, assuming a reasonable degree of competition, not much less.  The difference represented by the government subsidy in the form of Treasury loan the face amount of which exceeds its market value (the bank being paid the face amount of the debt) goes to the bank -- and directly into the pockets of bank investors.

Once the asset is out of the bank, it trades in the same market that does not benefit from the subsidy.  Indeed, one might expect that the prospective increase in the supply of these assets trading might depress the future price.  All of this merely goes to prove that the whole notion that the Geithner plan will create liquidity (are we short of liquidity or capital?), create a market, etc., etc. is just nonsense.  The only purpose of the plan is to give public money to banks, and thence bank investors, in return for nothing, but to do so in a manner that conceals the outcome by making it appear as some sore of private market transaction or private market "price discovery."  Hogwash.  It is a charade.  The ABX didn't take any time at all to figure it out.

Sooner or later, one way or another, the government is going to fill the hole that is the excess of bank deposits and interbank liabilities over the market value of bank assets.  Geithner and company, wedded apparently to the same free-market religion that got us into the mess in the first place (see, the Summers quote from 1999 about how the abandonment of regulation would bring us into "the next century economy" -- oh boy, we're here alright) seem determined to do this in the manner that is most costly and damaging to the public -- and gives huge gifts to financiers --  rather than risk being labeled as "socialists," or even "liberals," by the self-interested dons of finance.

In summary, Clay, the market is not "disagreeing" about price.  It recognizes that the whole premise is phony and thus has no reason to budge from the current price.

- roidubouloi

March 26, 2009 at 10:17am

Roi is right; one can only hope that the probable failure of the Geithner plan will clarify this notion of the market being able to correct itself in troubled times, and pave the way for some serious and effective regulatory reforms.

- GSpinks

March 26, 2009 at 11:28am

I bet it does look lke that Roi.  But I doubt  that fear of being called socialists drives this plan, nor do I think Geithner is intimidated by anything but the idea of the economy airplane crashing into the mountain, which is was about to.  That's just too deterministic to me.  This shit is just too complicated for black and white, I just don't buy that mind reading of the motivation stuff.  

Granted, we Democrats have a long and disgraceful record of spineless weinerism in the face of screeching ideolouges.  But those people lost their voodoo juice with the American people, the press and the Republican leadership (not the Republican hoi poi who mostly get it) somehow just don't know it yet.

I thought of you Roi, Noam, Clay - a very smart birdie told me last night that Giethner Co is being inspired by (among other things) the guidelines layed out in classic old economics/finance text from the 70's called Stablizing an Unstable Economy, by Minski.  It describes this exact scenario we're in right now, drowning in debt etc and suggested principles, steps to get the hell out.  

Another 1970's classic text making the DC brain trust rounds - Money and Banking by Mishkin, which is detailed stuff on how the plumbing of the fed/banking system operates.

I'd bet you and the other knowledge-meisters smarty on here have been exposed to these texts at minimum if not read them.  They sound like sleeping pills to me, but its catnip to finance and policy geeks.  I may try to plod through the first one, although I'm sure i won't make it before weeping in boredom. But I really do want to know how Geithner is thinking - not conjecture mind reading stuff, but real stuff.

- Wandreycer1

March 26, 2009 at 12:42pm

PS Needless to say these texts probably don't mention sub prime mortgage back securities.

- Wandreycer1

March 26, 2009 at 12:43pm

W,

If they are going to go this route, it would be far cheaper, simpler, and fairer to just lend a bank holding company the capital the bank is shortfall taking as collateral the bank AND the toxic assets.  That wouldn't be nationalization, the downside risk would be the same, but the losses would be a lot less than they are going to be with the Geithner plan.

It seems clear that they want to do whatever they can without need of legislation, but I cannot see how lending the same money to the banks rather than to so-called asset purchasers makes a bit of difference from that point of view.  I'm not quarreling with the objective of putting capital into the banks; we have not choice.  In this case, I am not even taking issue with the benefits that flow to existing bank investors, although they should not get a penny form the public in my opinion.  Incredibly, this plan not only puts money in the pockets of existing bank investors beyond what is needed to for the bank, it finds an unrelated third-party, hedge funds, to give money to as well, just upping the cost.  That is really kind of nuts.  It is like trying to avoid flying into a moment by deciding it would be a good time to practice flying upside down just for the hell of it.

- roidubouloi

March 26, 2009 at 1:18pm

Hmm.  You make alot if sense Roi, why not just call it what it is: lending the money with the banks as collateral. Is this the same idea as if you or I bought a house?  I see it that way, with a reverse mortgage eventually being negotiated (you can love here until you die, but then the bank gets the house).  

Maybe the investors, lenders, hedge funds, what have you - were the only source of capital available on the planet anymore and they only do things their way, at least in the moment (I'll cling to my first inning metaphor, but I think this morning was the end of the first.  We're in the second now).  

I remember you and some others saying this is also a huge failure of the political class and system, both in the last 15 to 20 years as well as in this crisis.  There is no more money or legislation coming directly from Congress, and in my opinion this is much more productive.  Geithner only has one boss he needs to please and he is.  I'm grateful to him for being willing to be the punching bag.

As hubby said last night "This is all like Fats Waller said: it aint whatcha do, but how you do it."

- Wandreycer1

March 26, 2009 at 2:07pm

I disagree with whomever it was that did the Financial Times analysis here. You really can't say the Geitner plan disappointed the markets because it didn't bounce up for the quite simple reason that markets anticipated this plan. So it is very likely that if the plan to purchase toxic assets were dropped in favor of more capital injections or some such that these prices would've collapsed, just as they did when Paulson said there wouldn't be any toxic asset purchases before reversing himself. That market action would imply something of a liquidity premium here, although I don't think this is necessary the most accurate way of looking at things.

My guess is that the ABX only would've bounced if a) the plan was the subsidy that the Paul Krugman's of this world would have us believe it is, (non-recourse loans or not, investors can still lose 100% of what they put up, and will do before the taxpayers lose cent one), and b) if it were much bigger. The latter is not an indictment of the plan mind you, but of the political consequences of populist intransigence and a opportunist Republican opposition that decry's doing anything outside of instituting a spending freeze, (if that were ever seriously discussed by the president or majority leaders of Congress, you'd really see the bottom fall out of these prices, to say nothing of the stock market).

The bottom line is that $500bn against supply of at least $2tn (and probably growing as the breakneck pace of the economy southbound has not yet abated from the data that I've seen), means plenty of supply going wanting still, even after some investors decide to stick their toe in. Alas, the irony of all of this is that we already know how to make the bad debt go away- create a bunch more credit. It really doesn't matter where that credit is created either. Just have a look at the early part of this decade. Huge amounts of poor corporate credit eventually disappeared beneath booming residential real estate finance that pumped massive amounts of purchasing power through the system that enabled corporations to repair their balance sheet.

The trouble with that is two fold- first, it requires greater inflation than that which triggered the mess. Second, when the federal government's credit line is all tapped out, well, I don't know that there's anyone left to turn to. Alas, who can worry about such trivialities when there's a deflation beast to fight. Onwards and upwards Ben. Get those rotors fired up!

- I Majorajam

March 26, 2009 at 2:18pm

oy vey - make that you can LIVE here until you die...

- Wandreycer1

March 26, 2009 at 2:34pm

Wandrey,

Even if you like the idea of doing this without any Congressional participation, i.e. legislation, the private capital mobllized is only 3-7% of what the Treasury is going to kick in.  To obtain this trivial amount, the additional losses the public will take will be many times the private capital obtained.  It would be much cheaper to lend the bank holding companies $535 billion with full recourse than it is to lend asset purchasers $500 billion with no recourse.  Surely, if the Treasury is able to lend $500 billion without going back to Congress under some theory or other, it can lend $535 billion.  So, what is the point of draining more money from the system and putting it in the hands of so-called "investors?"  None that I can see other than appearances.

- roidubouloi

March 26, 2009 at 4:16pm

I have to say I agree Roi.  From what you're telling me, appearances are the only excuse.  It's hard to figure out where the buck stops.  Except us.  Again.

I'm getting that book I mentioned tonight - Stablizing an Unstable Economy, a used bookstore has it.  Maybe this plan will make more sense.  But I have to say I agree with your last post.

- Wandreycer1

March 26, 2009 at 5:21pm