Monday, March 23, 2009

Geitner's plan and the naysayers

Regarding the Geitner plan to get the "toxic" assets off the books:

The naysayers and Professor Krugman (see his comments below) seem to forget about the power of self interest, profit and a free market. Nobody will buy "toxic" assets, subsidized or not, unless they believe the profitability is greater than the risk. Nobody is just going to give them away so a market must be created to find out their worth.

The value for these assets will be greater than their current zero dollars suggest, thus there will be a market for them- where their ultimate price will be set through the mechanisms of supply and demand. Ultimately, competition to profit from purchasing the assets based on self interest will set a true current value.

In the end, the assets will be removed from the books of the financial institutions, unless they purchase "toxic" assets or decide not to sell their own. Speculation based on self interest or "greed" as Mr. Krugman would probably call it is how markets work. People will purchase almost anything, if they believe the value will increase above the purchase price and there will be a free market operating in order to sell what they once purchased at some time in the future. The closer the plan is to the principles of free market capitalism, the greater the chance it will work.

Paul Krugman said,

And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

No comments:

Post a Comment