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Tim Geithner Offers Paralysis, Not Solutions

 

ALG Editor's Note: As ALG News previously reported this week, and as noted by the following featured commentary, Treasury Secretary Geithner's $2.5 trillion bank bailout plan will nationalize the banking industry:

 

February 12, 2009

Tim Geithner Offers Paralysis, Not Solutions

By John Tamny

Desperate to sell his economic plan in order to be crowned a “winner” in a political culture that equates stature with one's ability to fleece the taxpayers, Barack Obama defended his vision on Monday given his view that “The federal government is the only entity left with the resources to jolt our economy back to life.”

Apparently untroubled by the blinding irony that defines such a naive statement, he trotted out his newly minted Treasury secretary Tim Geithner on Tuesday to offer up concrete details as to how more resources taxed and borrowed from the private sector will fund his administration's vanity project. Needless to say, Randolph Bourne was wrong about war being the health of the state. In the modern world, economic crises exponentially trump inter-country conflict with regard to fattening up Leviathan.

After acknowledging that Americans had “lost faith” in an economic rescue plan that he was a principal architect of, Geithner added understatement in suggesting that there exists a great deal of “public distrust” when it comes to “taxpayer money being provided to the same institutions that helped cause the crisis.” But with successful political types nothing if not self-unaware, Geithner proceeded with a straight face to pitch a plan whereby $2 trillion more will be spent to prop up the same institutions that caused the crisis.

For the uninitiated, Geithner plans to put a bull's eye on the healthy banks in this country that will have to continue to compete with banks inefficiently backstopped by taxpayers. That Japan tried this and failed impressively doesn't seem to bother him one bit.

First up is what Geithner terms a “Public-Private Investment Fund” in which (try not to laugh) private investors will be asked to buy “toxic” assets alongside the federal government from the ailing banks. This is a variation of the ‘bad bank' scenario, but it's really no different.

The problems here are many, but assuming a natural bidding process, how is it that private investors with limited resources could outbid that which can tax unlimited funds from the productive sector while investing absent the pressure of achieving positive returns? Assuming the impossible, as in a natural market created unnaturally, what's certain is that the very purchase of these down-and-out assets would immediately make the banks selling them insolvent.

Since the above isn't in the cards, there will be a premium put on assets in order to reflate the banks. In that case, what we have is the ‘bad bank' scenario all over again and the buyers will be the same hapless taxpayers who didn't countenance TARP 1 to begin with. The “Private” in the Public-Private Investment Fund will merely be window-dressing meant to mask the banking industry's swallowing by the federal government. A sector already in thrall to the government will be even more under its thumb, and bank loans will more and more be a right rather than a privilege for those possessing good credit.

Of course there will also be direct capital injections into banks with the $350 billion in TARP funds left over from the Bush administration. Simplified, the very cash injections that occurred in concert with a freefall in bank shares will be tried again. With politicians, past failure is rarely a deterrent when there's money to spend.

What's not been acknowledged is the simple truth that the minute any business, including a bank, takes federal money, it is effectively dead. That is so because with government investment never passive, once a company crosses this line, it is no longer in business for profit. Still, politicians love to spend money and they can at least say they're “doing something” with money not theirs.

And if future Social Security recipients constitute the third rail of politics, homeowners have joined them on what is an increasingly crowded rail groaning under the weight of various sacred political cows. $50 billion will be spent to assist struggling homeowners with their mortgages, so while one part of Geithner's plan seeks to address toxic mortgage assets, another will make them more toxic given market knowledge that contracts between borrower and lender will soon be rewritten.

Worse, with it uncertain as to which homeowners will benefit from the latest taxpayer-sponsored mulligan, it can be assumed that many homeowners will go non-current on their mortgage payments in the hope that they'll luck into their own personal bailout. Much as the government has bailed out GM and Chrysler only to demand that they build cars no one wants, the Geithner plan seeks to address the toxic assets on bank balance sheets all the while making them even less desirable.

The Federal Reserve couldn't be left out, and given its unique ability to increase its cash on hand with a click of a computer mouse, the Fed will buy up as much as $1 trillion in student loans, car loans and credit card debt. Translated, with many businesses struggling to access capital amid what some deem a credit crunch, the Fed will help push even more credit into the hands of already strapped borrowers such that access to capital for businesses with designs on growth will be even more of a distant object. Adam Smith must be spinning.

And perhaps looking to hedge his credibility with regard to a plan that would make even the greatest optimist incredulous, Geithner explained that amid its staggered implementation, “We will have to adapt it as conditions change” and “We will have to try things we've never tried before.” Unsurprisingly, stocks cascaded downward after his press conference. Indeed, not only will the Geithner plan not work, but it will also be ever changing; meaning the intrepid investors lying in wait to start buying once the government stops distorting now have another variable to price called uncertainty.

Going back to the fall, a purely conjectural concept termed “systemic risk” was trotted out with great frequency to justify the bank bailouts. Looked at in the present, could systemic risk have possibly been worse than the emasculation of our banking system that continues unabated?

It would be hard to imagine an affirmative answer to the above. Instead, we have to conclude that an historical mistake was made in which supposedly free-market adherents gave up what they incorrectly deemed a little bit of market freedom in return for the false and oxymoronic God of government security. John Stuart Mill said paralysis is the certain result when governments offer cheap sustenance, and economic paralysis is what Geithner is delivering.


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