Thursday, Apr 02, 2009
Confidence will be eroded further
The New York Times: Obama’s Ersatz Capitalism
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 overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency.
Posted by devo @ 06:38 AM (660 views) Add Comment
8 Comments
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1. devo said...
What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.
Joseph E. Stiglitz
2. devo said...
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!
3. devo said...
If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.
4. devo said...
Brown: Robbing the pigs to reward our 'friends'? Brilliant plan Barry... wish I'd thought of it!
Obama: You will Gordon... you will.
5. d'oh said...
The whole Geithner plan stinks. It is even more of the same, socialising the losses and provatising the profits and Stiglitz is not the first to point out that this plan is just a way of robbing the taxpayer to get the nasty stuff off the banks' books without looking like pure nationalisation of the debt to the man on the street.
It is disgusting!
The fact that 90% of the population aren't rioting in the street suggests that the US public are bovinely cowed and stupid...or is it that a large portion of them believe that, given their obscene debts, this will work out well for them? Whatever the case the whole thing fills me with loathing of the whole system...there is absolutely no morality left. I see no reason to be honest and hard working anymore...none. I've more or less come to the conclusion that tax evasion is a moral duty. Boy are my kids going to get a different lesson about how to behave in society than what I did from my parents.
6. Cognoscenti said...
The only way to get these toxic assets off the banks' balance sheets in a fair way that does unduly encumber the taxpayer, is by allowing the banks to fail. Certainly there would be a certain cascade effect, but being "too big to fail" is absurd, and creates moral hazard - if a bank only borrowed and lent enough, it would put the taxpayer at its mercy by being "systemic". But the hopeless flailing around with obfuscation schemes designed to transfer the "systemic" risk to the taxpayer, is no less systemic once it sits uncomfortably on the public balance sheet, and given the globalisation in the finance industry and the politicisation of these decisions, are simply protectionist.
The Banks must be allowed to fail. The losses must be accepted by equity holders and bond holders. The fools must be parted from their money. It will hurt. It might even be seen as depressionary. But it will be over much sooner, the market will find its bottom, the point from which it can recover. However, a finance industry absolved of its utter failure, transferred to an overburdened and newly indebted taxpayer, is a recipe for a much longer and intractable depression.
7. timmy t said...
I think the US are taking a big risk here. Surely the time will come when people just stop paying their mortgage in protest. I would. The banks would be screwed - house prices would go through the floor, and they wouldn't be able to kick people out because they would be left with the outstanding debt because of the no-recourse system there.
8. george monsoon said...
Yesterday's demonstration in London is really just the tip of the iceberg.. The *ankers waving money from the windows is like the french gentry's behaviour just before the revolution.
This is the start.. Just wait until later this month when Brown ups the tax to extortionate new levels and by the end of the year, we are all watching our food and fuel skyrocket, and interest rates get hiked .. We are nearly at breaking point.. I think the majority of the population are in denial at the moment, but that will soon turn to anger and we WILL have civil unrest.
History does have a habit of repeating itself. Mark my words, please somebody.. quote me in 12 months time.!!