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The Bailout, again.
WPA Illustration about Money
Comment
March 27, 2009

On Monday, March 23, Treasury Secretary Timothy Geithner detailed the newest iteration of the government's plan to bail out the financial sector and loosen the credit market. And as Wall Street traders and analysts scramble to decode and judge the fine details of the plan — Who wins? Who loses? Can it be manipulated? — many people may simply wonder whether it will work.

The American and global economies remain in a recession, and unemployment is rising steadily in the U.S. If the problem is unemployment, some might wonder why Secretary Geithner's plan aimed at the credit markets. Economist Brad DeLong, a supporter of the plan, explains that profitable businesses that should be expanding and hiring are not doing so because they cannot secure the necessary loans at rates that make it worth expanding. Lending rates are extremely high because the whole ecosystem of lending is still shocked from the October 2008 credit freeze.

The End of the Recession?
If there is one thing most supporters and detractors agree upon, it's that Geithner's new plan will not end the recession. Combined with the fiscal stimulus package passed in February 2008, and the the government's recent investments in the markets, optimists hope the government can stop a further slide into recession or depression and begin turning the economy around.

The New Geithner Plan
To help banks sell their risky assets, the most recent Geithner plan offers a government subsidy to investors who want to buy them, turning a very risky investment into an attractive one, with more potential for investors to make money than lose it.

Mark Thoma, an economist at the University of Oregon, provides more detail on Geithner's and other plans, explaining the problem and the bailout with a metaphor about "toxic cars" on his blog.

Simon Johnson and James Kwak, of THE BASELINE SCENARIO do not think Geithner's new plan will work. In an Op-Ed in the LA TIMES, they outline three reasons to worry about the Geithner plan:

  • The subsidies may not be enough to persuade investors to buy the toxic assets.
  • The banks will be able to only sell their most toxic assets to the investors, and so investors will lower their bids accordingly.
  • If it does work, then taxpayers may be outraged at having helped investors profit.

Economist Paul Krugman, another vociferous critic of the plan, has more than technical criticisms of Geithner's approach — though he has those too — he believes that the Obama administration should be trying to change the way the world of finance operates:

But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.

As you can guess, I don't share that vision. I don't think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don't think the Obama administration can bring securitization back to life, and I don't believe it should try.

The Continuing Debate
For more debate, you can read a discussion between Paul Krugman, Simon Johnson, Brad DeLong and Mark Thoma discuss the Geithner plan on THE NEW YORK TIMES here. And you can read a chat between Simon Johnson, James Kwak, Brad DeLong and Mark Thoma at Seeking Alpha here.

Published March 27, 2009.

Related Media:
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Bill Moyers discusses the economic future with James K. Galbraith, Lloyd M. Bentsen, Jr. Chair in Government/Business Relations at the LBJ School of Public Affairs at the University of Texas at Austin. Galbraith is the author of six books, the most recent, THE PREDATOR STATE: HOW CONSERVATIVES ABANDONED THE FREE MARKET AND WHY LIBERALS SHOULD TOO. (October 24, 2008)

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JOURNAL guest-host Deborah Amos speaks with NEW YORK TIMES business columnist Joe Nocera about the bailout mania in Washington and who's next in line to get federal assistance. (November 21, 2008)

References and Reading:
"U.S. Expands Plan to Buy Banks' Troubled Assets," by Edmund L. Andrews and Eric Dash, THE NEW YORK TIMES, Jon Meacham and Evan Thomas, March 23, 2009.

"Treasury Maps New Era of Regulation "," By Damian Paletta and Jenny Strasburg, THE WALL STREET JOURNAL, March 27, 2009.

"European Leader Assails American Stimulus Plan"," By Steven Erlanger And Stephen Castle, THE NEW YORK TIMES, March 25, 2009.

"Room For Debate: Will the Geithner Plan Work?," Paul Krugman, Simon Johnson, Brad DeLong and Mark Thoma discuss the Geithner plan, THE NEW YORK TIMES, March 24, 2009.

"Treasury's Bank Recovery Plan," Read an archived live discussion about the Geithner plan by Simon Johnson, James Kwak, Brad DeLong and Mark Thoma at Seeking Alpha.

"The Quiet Coup"," by Simon Johnson, THE ATLANTIC, May 2009.

"The crisis -- and Geithner plan -- explained"," by Brad DeLong, THE WEEK, March 26, 2009.

Guest photos by Robin Holland

Also This Week:

WILLIAM GREIDER
For years best-selling author William Greider sounded the alarm about Washington's unholy alliance with Wall Street and the failure of the Federal Reserve and other regulators to take preventive measures to avoid disaster. Now, he offers some suggestions to the question everyone is asking: "What do we do now?"

>THE NEW BAILOUT DEBATE
Is Geithner's plan a 'triumph' or a 'flop?' Who wins and who loses?

JAMES THINDWA
James Thindwa, whose campaign for economic fairness for working people in Chicago has brought him up against the city's powerful political establishment and corporate giant Wal-Mart.

>AMERICA'S WORKERS
The Living Wage, Employee Free Choice Act and the state of the unions.

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