The Geithner plan: criticisms are off the mark (Michael Spence)

[ProSense]

The Geithner plan: criticisms are off the mark

April 7, 2009
By Michael Spence

Depending on who you ask, the pubilc private investment programme announced by http://www.ft.com/cms/s/0/86ab7a64-1d65-11de-9eb3-00144feabdc0,dwp_uuid=a4559040-e7c3-11dd-b2a5-0000779fd2ac.html">Tim Geithner is either part of a solution to today’s banking crisis or an aggravator of the problems. This debate will likely widen as the US government moves from the design stage to implementation.

What are the key features of the Geithner plan? Government and private investors put in equal amounts of equity; this is supported by the provision of cheap leveraging through government debt (up to six times leverage); and the government provides a non-recourse feature equivalent to a put option in case that the ultimate value of the package of securities turns out to be less than a pre-specified amount. The purpose of this feature is to take away the risk of a large loss of the investor. It is insurance against the left tail outcomes. In return for the put the government takes warrants which add to its equity fraction in case the final value is greater than the debt. Sellers auction packages to the buyers. The private investors in the buying entity (with the government) set the bid prices.

Markets reacted well to Mr Geithner’s efforts to line up capital, financing and management expertise in order to liquefy the market for legacy assets residing on banks’ balance sheets, thereby facilitating their lending activities.

At the same time, in widely-publicised remarks, several prominent economists criticised the plan, arguing that it provides government/taxpayer “cash for trash,” constitutes a huge giveaway and robbery of the US taxpayer. This is a mistaken view. It is based on an assumption that debt will be overused by the government and the participants in cases where the left-tail or downside risk is very high.

<...>

The criticisms seem to assume that all the packages are trash (in slightly more technical terms, low value relative to book and high variance or fat tailed) in which case the use of non-recourse debt automatically involves a significant taxpayer transfer to some combination of the buyers and sellers, mostly sellers.

If the critics are right that all the packages will turn out to be high risk (often measured by the variance) and if the government implements properly then there won’t be much leverage in the observed outcomes.

The reason this is important and not just technical, is that stabilising the financial system is going to require a complex set of government and central bank initiatives undertaken with imperfect knowledge of consequences.

That challenge is going to be much harder with a competent and well-intentioned government (which we have) if our fellow citizens who are understandably confused and very angry, think the government is trying to bail out the financial sector and doing it in a surreptitious way.

Michael Spence received the Nobel Prize in economics in 2001 and is chairman of the Commission on Grown and Development

Michael Spence: bio

[FrenchieCat]

1. Bingo in reference to.....

That challenge is going to be much harder with a competent and well-intentioned government (which we have) if our fellow citizens who are understandably confused and angry.

1/2 of the solution is confidence, and the fact that some are attempting to undermine such
is not helpful. That's the sad part about this.....

[depakid]

2. " The criticisms seem to assume that all the packages are trash" ???

Errrr... how many criticisms have said ANYTHING of the sort?

None that I have read.

But then again, neither facts nor the ability to review them seem all that important to Gaithner Summers apologists.

[Aloha Spirit]

4. Krugman for one thinks the PPIP is doomed to fail because the asset are worthless.

[depakid]

6. No, that's not what he- or anyone else on that level has said at all

The assets in question are illiquid because their owners want more for them than buyers are willing to pay. Some indeed, are worth very little- others will likely yield a good return.

It boggles the mind why anyone informed on the matter would make a statement like Spence's.

[Kurt_and_Hunter]

8. False.

There is vernacular "worthless" and money "worthless."

No economist I know of has ever said these assets have no monetary value.

On the other hand, since the catastrophic devaluation of specifically the assets we are talking about has ruined the economy of the entire world they are not what one desires in an investment.

Did people trot out straw men in the 1980s (in the way the OP does) regarding "junk bonds?" They were not literally "junk." Many of them paid off in full at good rates of return.

But the phrase "junk bond" conveys a certain unreliability relative to price.

"Cash for trash" is the same sort of phrase.

[Median Democrat]

21. Brad Delong has also raised this same point about Krugman's critique

[Fire1]

45. Not so much 'worthless' as 'undervalued.'

[Kurt_and_Hunter]

3. Not all Nobel prizes are created equal, it seems...

"The criticisms seem to assume that all the packages are trash (in slightly more technical terms, low value relative to book and high variance or fat tailed) in which case the use of non-recourse debt automatically involves a significant taxpayer transfer to some combination of the buyers and sellers, mostly sellers."

Funny that you can win the Nobel prize in economics without having "risk" as part of your vocabulary.

Substitute "potentially" for "automatically" and nothing much changes. It is an assumption of risk, not a set outcome. And people can be rationally critical of having their money stolen outright or gambled.

"Critics act as if playing roulette with FDIC non-recourse roulette loans automatically results in loses to taxpayers."

See... people win at roulette sometimes. I've seen it with my own eyes. So these critics of the FDIC roulette-loan program are hysterics!

"Automatically" is a pure straw-man beneath the presumed dignity of someone I assume is a pretty smart guy.

Also, the question of whether the assets are "trash" depends on what is paid for them. He's playing a word game. Since the glib phrase "cash for trash" is most associated with Krugman the implication is that a literal parsing of a flippant catch-phrase represents the entirety of Krugman's criticism and that Krugman is thus literally saying that none of these assets have any value whatsoever. So that's another straw man.

These assets are marked on the banks books at billions. They are not literal "trash." (Just as not all "junk bonds" are junk... it's an expression.)

But since the program is designed to overpay for assets there's no reason to assume the purchases will contain value relative to their cost.

If you pay people to buy things for more than they are worth using someone else's money that's what it is... trash or not.

[ProSense]

10. So now you're questioning Spence's Nobel Prize? What about

Stiglitz's, is that in question too?

recipient of the 2001 Nobel Prize in Economics, along with George A. Akerlof and Joseph E. Stiglitz, for their work on the dynamics of information flows and market development.

[Kurt_and_Hunter]

12. Oh Prosense...

The point is that the OP is well beneath the level of seriousness (and candor) one expects from a noted economist, not that Spence is not a brilliant economist when not writing tendentious op-ed level pieces.

I do, however, Henry Kissinger's Nobel Peace Prize.

[ProSense]

15. Kissinger is a Nobel Prize winning economist?

Your summations of the economy, economic policy and theory that you gather from all part of the internets and present here are lacking. You can have your opinion, but please don't condescend in trying to present your disagreements.

[Kurt_and_Hunter]

31. If condescending, I apologize

You took a colloquial jest about a Noble prize winner saying something dumb (which they all do, as do we all) at face value, which seemed to me to be disingenuous.

There was no serious suggestion that mister Spence didn't deserve the Nobel prize or that his understanding is lacking. He knows a million times more about economics than I ever will.

But that doesn't make him honest. The suggestion was that he must be being disingenuous in the OP precisely because I KNOW that he knows better because he is a brilliant economist.

The Kissinger remark is in response to the concept of "questioning" someone's Nobel prize, as if it's something we are obliged to take seriously.

I know that a lot of folks here say things like "I'll take a Nobel prize winner's opinion over yours..." but I am not one of them. I don't want to have to subscribe to everything Milton Friedman ever said, even though he was smarter than I am. Same goes for the "Obama is a constitutional scholar" nonsense... yeah, but Scalia is a more esteemed Constitutional scholar and he's bat-shit crazy.

Credentialism is a sickness.

Friedman, Krugman and Spence all have the same prize. Since they disagree they can't all be right, so the prize doesn't tell us much beyond knowing the person is, at least, a talented economist.

[Phx_Dem]

5. Spence actually won his Nobel prize in economics instead of World Trade.

I'm not sure how much that matters, but since DUers are forever throwing his Nobel Prize in everyone's face, it's worth noting that he won it in World Trade, not economics.

But I'm sure Spence must be wrong since his name isn't Paul Krugman. :crazy:

[depakid]

9. Spence is making stupid statements-

And one would hope that (Nobel Prize or not) if an astrophysicist said "the moon was put there by God 8,000 years ago" and "the dating methodologies we've used are simply Satan's way of tricking us -you'd look at that and say: :wtf:

I know it's not in vogue for some to criticize anything this adminstration ever does- but I mean, please.

[ProSense]

11. Your claim is simply ludicrous. n/t

[depakid]

13. I guess some would go so far as to think the moon is made of green cheese

We should all be for reasoned- and reasonable debate- ethos, pathos and logos included in that- but how about some honesty on the facts?

Even high school kids understand after doing some http://www.nflonline.org/Rostrum/Coach1104McCrady">forensics that ridiculous counterfactuals get people nowhere at the end of the day.

[ProSense]

16. This isn't about the moon or green cheese. Stay on topic. n/t

[depakid]

17. Of course it's about green cheese

as green cheese relates to http://en.wikipedia.org/wiki/Abstraction">abstract thought which in turn relates to how we analyze things we see in detail and try to make some common sense of.

[NJmaverick]

25. Spencer actually provides an intelligent and logical explanation

to support his statements. That's more than Krugman and co. are doing. Granted it's Spencer's explanation is lacking in simpicity, so there are many that will dismiss it out of hand, but that doesn't make it any less valid.

[depakid]

43. Right on que

[EmilyAnne]

51. Stupid? Really? How can you compare Spence's statements to an astrophysicist saying that God put

the moon in the sky 8,000 years ago?

Do you honestly see any sort of parallel here?
What did I miss?
Did Spence say that God is going to fix the economy through his holy vessel Tim Geithner?
Is he using magical, irrational thinking?
Because I missed all that in the OP.

Your argument is basically IF someone says something stupid, we would say: WTF. Therefore, Spence is stupid?
IF a nobel prize winning economist said that God will tell Geithner the proper value of the toxic assets, we would look at that economist and say: WTF?
Why, yes. We would.

And this relates to Spence and criticism of "anything this administration does", HOW?
Your argument is fascinating.
Its like logic, upside down, inside out and backwards.

[PBS Poll-435]

7. Finally. Just wait for the Kruglodytes, though.

:thumbsup:

[brentspeak]

14. How are the criticisms "off the mark"? Spence doesn't bother to say.

Where in the article does he rebut any part of the critics' claims?

[NJmaverick]

26. Did you read the article????? That is what the article is all about

[brentspeak]

29. Yeah, I did read the article

and I still don't see where he countered any of the critics he's addressing:

At the same time, in widely-publicised remarks, several prominent economists criticised the plan, arguing that it provides government/taxpayer “cash for trash,” constitutes a huge giveaway and robbery of the US taxpayer. This is a mistaken view. It is based on an assumption that debt will be overused by the government and the participants in cases where the left-tail or downside risk is very high.

Ok, but where in the article does Spencer rebut what he says is the critics' assumption?

The criticisms seem to assume that all the packages are trash (in slightly more technical terms, low value relative to book and high variance or fat tailed) in which case the use of non-recourse debt automatically involves a significant taxpayer transfer to some combination of the buyers and sellers, mostly sellers.

Again, he just summarizes one of the critics' points, but then fails to actually address it beyond that. (Actually, he falsely summarizes the critics' point -- who exactly said or assumed that "all" of the packages are trash?)

[NJmaverick]

38. It's clearly a wrong assumption (that all packages are trash)

he felt that was self evident

[girl gone mad]

18. "thereby facilitating their lending activities"

Umm... no.

There is absolutely no guarantee that banks will resume lending at previous levels. Consumers and businesses have scaled back borrowing quite significantly. Banks have no incentive to lend more in a deteriorating economic environment and PPIP does nothing to induce increased lending.

Geithner has not explained how increasing personal, business and financial debt will solve a crisis that was caused by too much personal, business and financial debt. Nor how transferring debt from the balance sheets of banks onto the national balance sheet will improve our overall economy.

Spence's claim is rather dubious.

[NJmaverick]

27. You are mixing up your rebuttal. First you use "return to previous level"

then you pull a bait and switch and substitute increase lending.

[girl gone mad]

32. Increase lending or return to previous levels..

either way, that's completely beside the point.

There is no guarantee that the banks will lend to Americans with the money they get from the PPIP recapitalization scheme. There is no rationale from Geithner as to why more lending (i.e. more DEBT) is a desirable national economic goal.

[NJmaverick]

36. If you had read the article, you would have known he covered this issue

The reason this is important and not just technical, is that stabilising the financial system is going to require a complex set of government and central bank initiatives undertaken with imperfect knowledge of consequences.

[girl gone mad]

42. That doesn't address either of my points.

I don't think you get it.

[NJmaverick]

52. What I get is that ideology is a poor choice when it comes to solving problems

We have seen in fail when the right wingers tried and I hope the liberals are smart enough to learn from their mistakes (rather than learn it the hard way).

[NJmaverick]

19. The nail was squarely struck on the head

about time the sensible voices spoke out.

[Political Heretic]

20. That was a good read.

However it sort of sounds like Spence is saying, if everything goes perfectly, this will work. But those silly critics are assuming things won't go perfectly, which is why they are wrong.

In which case I'd say Spence is putting too much faith in the perfect execution of this program, and is assuming that everyone involved has the goal of restoring the market when most likely many of the players involved have the goal of making as much money for themselves as they possibly can and screw everyone else.

Still... I only read this on DU, I need to go read the full article before I comment too much.

[paulk]

22. so now the score is

Two liberal Nobel prize winning econominsts who think the plan is crap

and one conservative Nobel prize winning economist who thinks it's great.

Who should a progressive/liberal Democrat listen to?


http://en.wikipedia.org/wiki/Hoover_Institution

[NJmaverick]

23. One of your "liberal economists" should be disqualified

as he shown to have agendas that go beyond discussion the issue in a factual and truthful manner.

[paulk]

24. ah, yes -

the "character assassination" argument...

[NJmaverick]

28. Nope, that's a straw man defense. The fact of the matter is

that when Krugman threw his hat in the political arena, first backing Edwards, then Backing Hillary and finally reluctantly backing Obama over McCain, he lost the right to be considered an unbiased economists. He now has motives that go beyond just sound economics, like proving he was right in picking others over Obama. Plus since he has gone on record stating with out reservation that Obama's plan will fail, he has every reason to try and undermine the publics confidence in those plans. Otherwise he loses all credibility and relevance and there goes all his TV appearances.

[paulk]

30. he didn't "reluctantly" back McCain over Obama

sigh...


speaking of credibility, when say things like that, you lose it.

[NJmaverick]

35. Can you provide a link to support your assertion?

[paulk]

40. you're the one who made the assertion

I knew there was a reason I'd had you on ignore.

[Name removed]

33. Deleted message

Message removed by moderator. Click here to review the message board rules.

[Name removed]

34. Deleted message

Message removed by moderator. Click here to review the message board rules.

[ClarkUSA]

37. Even MSNBC's Chuck Todd dismissed Krugman as having "an emotional bias" against Obama...

... during an interview with Andrea Mitchell a few weeks ago where she quoted one of Krugman's PUMAesque naysayer
screeds and asked for Todd's response.

Chuck Todd paused and replied dismissively, "Well, Krugman has an emotional bias, so I would take what he says with a
grain of salt. That's all I'm gonna say." :D

Notice how quiet Krugman has been since economic indicators and the market have been rebounding? :eyes:

[NJmaverick]

39. Not surprising, it's pretty obvious

[Aloha Spirit]

44. He contends that things are getting worse more slowly

instead of getting better.

It was in his blog then he repeated it on Maddow last night.

I dunno, I think Obama likes having folks like him around to make a little friction.
Seems like he enjoys proving people wrong.

[ClarkUSA]

46. lol! He has a serious ego problem & can't admit all his doomsday predictions have been for naught.

There's been a confluence of good news regarding the nascent economic recovery. Among the indicators that can be cited:

The best stock market month in six years… Consumer confidence and spending are up for the second consecutive month…
Gallup also finds “a significant improvement in public attitudes (about the economy) after nearly two years of downbeat
forecasts.” (That’s significant because consumer spending - and thus economic activity - rises along with consumer
confidence)… Orders for “durable goods” – refrigerators, autos, TVs, etc. – are up for the first time in six months… New
home sales rose at their fastest pace in ten months… Four banks have already paid back their “bailout” loans to the government
and more are hurrying to do so (that some seem to think “bailout” means a giveaway is consequence of the inaccuracy of the
word)… The renaissance of the renewable energy sector of the economy has begun…

Clearly, the economic situation remains precarious. Employment numbers traditionally lag behind the aforementioned
economic indicators, and too many millions are still jobless. The fall of a single economic giant on such a fragile fault
line could still set off a 1929 style chain reaction (and those who say “let them fall” seem oblivious to the fact that it is
the workers and the poor underneath those mammoths that would be crushed so much more brutally should that happen).
But in less than 80 days of the new administration, the downward spiral has slowed, in some areas stopped, and in others
has begun to tick up again. What we are seeing are the beginnings of a trend.

[brentspeak]

47. Oh, even Chuck Todd dismissed Krugman...

You mean that great brain and intellect...Chuck Todd? :spray:

[Sentath]

41. I am NOT highly financially literate

But, with the limiting and qualifying statements, the call for forensic audits and the shaping of the recompense and insurance bits of the plan it FEELS like something quite different from what SEEMS to be shaping up to happen.

[Thrill]

48. No one knows what will or won't work. Because they've never seen anything like this.

[EmilyAnne]

50. I agree. nt

[jeanpalmer]

49. If these things were worth what Timmy,

er the taxpayer, is going to pay for them, someone would already have paid that price to buy them. The reason they're sitting there unsold is because they're not worth much, intrinsic wise. They're worth something under the Geithner plan because the taxpayer will play the role of the sucker, fat tail and all.

WTH is the Comission on Growth and Development????

Jesus christ they hand out these nobel prizes to just about anyone who will champion the cause of the bankster. All of these idiots like Spence were/are wrong. They're why we're in this mess, and their nobel prize theories aren't worth shit.

[paulk]

53. so, what's your opinion, prosense?

are you swayed by the argument of a senior fellow at the right wing Hoover Institute?

Do you wonder why a right winger like Spence would support this plan while a whole host of left wing economists think it's a bad idea?