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Brad DeLong writes the FAQ for the Paulson/Geithner plan

Mandos's picture

Brad DeLong has a condensed FAQ of the Geithnerist POV on the bailouts. Naturally, to read it as intended, you have to make the first assumption is that it (the bailout) is being done under good faith.

Q: What is the Geithner Plan?

A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit.

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?

A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

The second question is the most dubious one. It assumes that Geithner et al. have committed to this course because our very civilization depends on the toxic assets being undervalued by investors. As a mainstream economist who believes in Market Failures (well, so do most American liberals...), DeLong seems willing to grant that this is actually a market failure.

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Submitted by lambert on

Brad DeLong writes:

"... risky and distressed but probably fundamentally undervalued assets..."

Why not convert "probably" "very probably" or even "certainly" by allowing the loan tapes to be examined? Surely it makes no sense for tax payers to invest trillions of dollars in this program without even the most cursory due diligence?

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I tinkered with the headline.

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Also, DeLong, like BooMan, thinks a lot of the problem is with the PR, not the plan. That makes no sense, given that Obama ran the best campaign in recorded history and has a brilliant record as an orator. How, then, could bad PR be the problem? It's a lot more probably that the administration has made the best case that can be made -- among people who matter, anyhow.

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Angry Bear reacts to DeLong.

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Submitted by Mandos on

DeLong and BooMan are saying different things. DeLong seems to think that the bailout concept is sound, and therefore it needs better defending. BooMan doesn't know whether it is sound or not, but believes that the Obama administration needs to defend *whatever plan they come up with* better for the sake of survival and future manoeuvering room.

The difference is important. If the bailout plan is not sound, DeLong is fully wrong. But BooMan is not necessarily wrong if the bailout plan is not sound, because he does not directly require its soundness.

Submitted by lambert on

1. Yes, that's a better explication of DeLong and BooMan than my "thinks a lot of the problem is" weasel wording.

2. The comments at DeLong's are interesting; they raise the point that that "assets" includes not just the actual houses but all the derivatives, too; hard for the naive to comprehend.* For one thing, I'm with Gao Xiqing: "They're crap". For another, why am I paying off the gambling debts of the banksters? Finally, surely determining the value of the mortgages the derivatives are based on is part of due diligence?

NOTE * Versailles isn't a hall of mirrors for nothing....

Mandos's picture
Submitted by Mandos on

Well, it's clear that a certain segment of mainstream economics that includes Geithner and DeLong and Summers---again, taken on good faith---believe that

1. Running an economy based on private lending is necessary to keep civilization afloat.

2. These are the systems that should be doing the lending.

3. If so, then their failure to lend is the real problem.

4. If the failure to lend is caused by the toxic assets, then the problem to solve first is the toxic assets.

5. If the toxic assets are a soluble problem, then they must be detoxified (aka, made saleable).

6. If they can be made saleable, but are not saleable now, then they must be undervalued.

7. If (6) is false, then (2)-(5) are false, working backwards. Then (1) is an impossible goal. Then civilization is over.

I assume the reader can come up with the appropriate objection at every step of the way.