Obama’s Ersatz Capitalism by Joseph E. Stiglitz

[leftchick]

Published on Wednesday, April 1, 2009 by The New York Times

http://www.commondreams.org/print/40264


The Obama administration's $500 billion or more proposal to deal with America's ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win - and taxpayers lose.

Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by over leveraging in the public sector, excessive complexity, poor incentives and a lack of transparency.

Let's take a moment to remember what caused this mess in the first place. Banks got themselves, and our economy, into trouble by over leveraging - that is, using relatively little capital of their own, they borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations.

The prospect of high compensation gave managers incentives to be shortsighted and undertake excessive risk, rather than lend money prudently. Banks made all these mistakes without anyone knowing, partly because so much of what they were doing was "off balance sheet" financing.

In theory, the administration's plan is based on letting the market determine the prices of the banks' "toxic assets" - including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.

The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily "value" their potential gains. This is exactly the same as being given an option.

Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year's time. The average "value" of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is "worth." Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

[polichick]

1. I agree that it makes no sense to "solve" the problem using the...

...same people and tactics that created it. President Obama seems so bright in most ways, but I don't see how he can fall for this stuff.

[Name removed]

2. Deleted sub-thread

Sub-thread removed by moderator. Click here to review the message board rules.

[ihavenobias]

11. But you don't get it, he HAS to choose those people, they're the ONLY ones who get it!

;)

Man do I hate that argument. Really, the fox is the only one who knows how to guard the hen-house? Bullshit!

I know some DUers think we're being anti-Obama (very much not true in my case and the in the case of *most* that I've seen), but I have to ask why ?

Not to mention .

K & R

[Hell Hath No Fury]

3. I've known Leftchick here for 8 years.

I've known you for all of 5 minutes.

Guess who I'll be listening to.

[leftchick]

8. thank you

I am so glad there are folks like you who recognize the content of my posts and don't assume the worst. There is a very prolific poster here who posts the good, bad and ugly like myself and repeatedly makes the greatest page daily. Perhaps it is a group think thingy, I dunno.

anyway, peace

lc

:)

[Hawkowl]

12. Keep up the good work!

Don't let the knuckledraggers drag you down!

[JoseGaspar]

4. Stiglitz is a PUMA...

...and he is jealous of Obama... and he is has a really big EGO... and he writes horrible things in the NYT... and...

Oops... wrong guy.

Never mind.

[chaska]

5. We need to remember that just because the Repubs are against Obama doesn't mean...

we should necessarily be for him in all cases. He's doing some good, but he's not right in trying to resurrect this corporate corpse. These too big to fail entities need to be broken up or dissolved, not propped up with tax payer money.

This is just amped up Reaganism: Trickle up economics.

[Hawkowl]

13. It's just crap.

The first rule is if you are in a large hole: stop digging. This economic plan is just more "digging", more Wall Street welfare with no accountability. I think Obama NEEDS us to push him with our outrage to do the right thing.

I truly believe that right now, only 60 some days into his presidency, that Obama just does not have the political juice to push Wall Street around. At least not like he canned Waggoner at GM. If we keep screaming though, he soon will have the juice to fire the assholes in charge at Bank of America and Goldman Sachs. It is coming because Geithner's plan will fail.

[Hell Hath No Fury]

6. One of the first faxes I fired off to Obama...

was when the whole TARP thing started up -- I was incredulous anyone would vote for the damned thing without hardcore, pro-taxpayer conditions being attached

The second fax was when Summers and Geitner were put forward. I mean really, now Fox meet henhouse.

Now this new payout.

I want to see the terms and conditions. I want to see the new industry regulations.

Until then, I am not interested in giving these vultures another dime.

[ProSense]

7. Question

here

[leftchick]

9. the US already owns 80% of AIG

and can do whatever it wants. IF the government wanted to.

[ProSense]

10. That doesn't answer the question. n/t

[leftchick]

14. here you go

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=103x437846