MacroScope

Wall Street ‘yes,’ economists ‘no’ — what’s your call?

March 24, 2009

U.S. President Barack Obama receives a daily economic briefing in the Roosevelt Room of the White House in Washington, March 23, 2009. Chairman of the Council of Economic Advisers Christina Romer (L) and U.S. Treasury Secretary Timothy (C) Geithner are also pictured. REUTERS/Larry Downing (UNITED STATES POLITICS BUSINESS)The Obama Administration’s toxic asset plan got rave reviews from Wall Street yesterday, but not so much from a few Nobel-prize winning economists.

Economists Joseph Stiglitz and Paul Krugman separately blasted the plan. Stiglitz told Reuters that the plan will rob taxpayers by exposing them to too much risk and is unlikely to work as long as the economy remains weak.

“The Geithner plan is very badly flawed,” Stiglitz said. “Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”

Krugman, a columnist for the New York Times who received his Nobel Prize in Economics last year, said of the plan: “This is more than disappointing. In fact, it fills me with a sense of despair … Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.”

Wall Street on one hand, economists on the other: What do you think about Obama’s plan? Leave your answer in the comments below, or send a Twitter message @reutersgr8db8.

More on the toxic asset plan:

Comments
28 comments so far | RSS Comments RSS

I am having a hard time what this is exactly going to do for us, the consumers. Buying toxic assets so that banks can lend out more of the same? Last fall we did some home remodeling and tried to refinance our home in order to include our home remod. costs, but we could not get approved even though our credit scores were great. Then just recently Wells Fargo started calling us telling us that they had reviewed our application and they could now get us financed. Hmmm, sounds fishy to me.

Of course we did not do it and want nothing to do with refinancing now.

Posted by Ann | Report as abusive
 

Printing more money isn’t going to fix anything. In fact, the dollar will become much like the peso where it will eventually cost $100,000 for a loaf of bread.

Socialism….that’s were this country is headed unless the American people wake the hell up!

Posted by bob | Report as abusive
 

I think the plan is terrible. I am very hostile to those that got us here. Enough to want to see them feel some REAL pain the way most of the country does. I am for letting the insolvent banks that got us here fail, temporarily nationalize them and auction off the toxic assets. At the same time and most important, get rid of all of the “Elite” that brought us to this dance including the board of directors. Give them some pencils and tin cups. I absolutely don’t buy that they have all of the financial smarts and they are the ones that must lead us out of this mess! I believe there are plenty of smart, talented more junior managers that aren’t as tainted and would learn a valuable lesson from harshly punishing those that brought us here. As it is proposed all you are teaching those to come is “do what makes you rich and take whatever risks are necessary. The working people and their children will bail you out if you fail and you can still keep your ill begotten riches.” I think the taxpayer costs of nationalization would not be much different and the message would be a lot better! I really believe the bad message to our future financial leaders is the worst thing about most of the plans.

 

This could be the ultimate rip-off of the American people. Why? Because the same institutional investors who will be deciding at what price to buy these distressed assets are associated with the institutions that are selling them. Undetectable collusion and price fixing are likely to result. This means the Banks sell their “distressed assets” at an artificially high price to themselves essentially and the taxpayer and the holders of U.S. currency are robbed. This plan is idiotic and criminal.

Posted by Jonathan Cole | Report as abusive
 

The plan is good for the insiders, like Wall Street and their representatives in Washington. I agree with the economists that this is not a good plan and it will have unforeseen consequences for the economy.

Posted by Marv | Report as abusive
 

I’m surprised at the hostile and pessimistic comments so far. With the wealth of bipartisan competence we’ve seen the past six months, I don’t know why anyone would doubt the government.

Posted by Russ in PA | Report as abusive
 

Sincerely I don’t know what to make of it yet. I hope to have a nice summer with lovely memories to help me cope with the rest of the year.

Posted by Daniel | Report as abusive
 

About 20 years ago, I was listening to my father-in-law talking about starting a bank with his buddies. I remember thinking “Wow, so anybody can start a bank?” But after quite a lot of research they dumped the idea because their initial fees couldn’t compete with the larger banks. What would happen if we let the banks fail? They would go bankrupt and yes, it would be problematic at first, but the end result would be a bunch of people pulling together and starting up new banks. These new banks would know better than to make unwise, greedy decisions about loans because they will have seen what happened to the banks that we let fail because of it. Why does everyone think the world would come to an end if we let these banks go bankrupt?

Posted by Karen | Report as abusive
 

every toxic asset is worth less than 50 cents on the dollar based on their default levels.

Their value is never going to go up due to:

– an aging US population
– less demand for homes and too many homes in inventory
– americans are upto their eyeballs in debt (they cannot borrow jumbo loans anymore)
– us govt is trillions in debt
– most us consumers (and US government also) are bankrupt.

So basically Geithner is robbing all the american taxpayers in broad daylight, to pay his wall street pals.

geither and Obama economic team (and oh yes , ben bernanke) should be in jail.

Posted by john doe | Report as abusive
 

The media gets excited when Wall Street goes up but the media is largely run by corporations. What everyone needs to remember is that the banks and the investors are not looking out for us little guys. The problems have not been just the banks. For years, the average worker like myself has not been paid enough and not received any or decent raises to keep up with inflation. Pouring the little guys’ money into the sinkhole created by the big guys who stole it will not help our problems.

Posted by Dru Murray | Report as abusive
 

In my opinion:

-In the first place, if the housing bailout was made MANDATORY for lenders to comply when housing bailout #1 (last year) and #2 (earlier this year) was rolled out, then a) more homeowners would’ve stayed in their homes and b) possible increase in chances in consumer confidence and c) possible slowdown of unemployment would/would’ve happened.

Bottom line is that the bottleneck needs to be address and the lenders are the bottleneck. Incentives are great but until there’s more muscle applied, there won’t be any major changes in the housing crisis.

Posted by Clare | Report as abusive
 

The problem isn’t the lack of credit, the problem is the lack of credit worthy borrowers. US consumers are maxed out, we need to begin saving again and no matter what the gov’t does–this bubble will not be re-inflated again! Also, this plan places the losses squarely on the backs of US taxpayers, our kids and even their kids–because it is doomed to fail for reasons given above. “Heads ‘Smart Money’ who invests using the gov’t financing WINS, tails the US taxpayers LOSE”. Where’s the “Change”? This plan is recycled from one the Treasury was floating back in October…

 

The money supply got out of hand, leading to increased, and sometimes improper, lending. In the end, creating more money may infact do more damage than good. I’m sure glad they put Martha Stewart in jail.

Posted by Juan R | Report as abusive
 

How did my grandfather feel when FDR passed a law saying he had to hand over all his gold and replaced it with worseless paper with an imaginary value assigned to it? This is the final push to prove how worseless that paper really is. Krugman’s and others’ “depression economics” is being pushed as what should be done instead of what should be shouted down as an un-American submission hold on the individual’s right to life, liberty and the pursuit of happiness. Time to wake up! Less government & free market practices are the only prosperous solution based on Reason and experience.

Posted by DMK | Report as abusive
 

I favor the plan, although aware of its final effectiveness, as any contribution of private “smart” money will calm my feelings that taxpayers are taken for another run. I would go further, I encourage the government to buy assets where quick money can be made, just to make us feel a little good about it….just think the price effect on the Tier one bank subordinated market or to low end investment grade corporate bonds!! these assets are depressed beyond rationality and just a signal from the authorities will make them rocket, and we taxpayers will be praised for making a quick buck and returning liquidity to these no-man’s land markets…..

 

I would like to have MR. Geithner explain to the public what the toxic assets are before making a decision as rather this is a good or a bad deal for the country. I think that just the definition “toxic assets” already tells us these assets may not be a bargain at any price.

Posted by Craig Coal | Report as abusive
 

Just a couple of Words Tim: PERFORMANCE BENCHMARKS.
Mr Geithner WHY can’t you insist on performance benchmarks that MUST be met for the program to continue. If these SleezeBalls from the banks get Greedy and try to hoodwink the public and your “benchmarks” are not met, then cancel the program.

Banks, consider the Consumer the #1 Toxic Asset currently.

Tim Keep the Banks and Bankers on a VERY short Leash.

Posted by Wilson | Report as abusive
 

What do I think of Obama’s plan to put all of this economic toxic debt on the taxpayer’s shoulders? Are you kidding me? That is criminal. We the people are at war with this globalist world bank agenda, precisely what obama represents. World bankers. Americans should have voted for Ron Paul.

Posted by jason | Report as abusive
 

When I bought my first house over 30 years ago, I went to my local bank and they thoroughly checked me out. They asked me how much debt I had, how much I made and how long I had worked for my employer; they asked me how much I had in my savings account. And they required proof and validation of everything.Then the bank told me how much house I could afford. When I found a house I could afford, the bank required a careful appraisal and a 10% down payment. They charged me 7.5% interest on my loan while they paid their depositors only 4.5%. I begrudgingly accepted this usary as a way to put a roof over my family’s head.

Small, smart banks across the county have been doing this for decades–protecting the assets of their depositors, making money, and providing a valuable service to hard-working, credit-worthy American workers.

The financial wizards of these-too-large-to-fail finacial institutions are not the geniuses that they are made out to be. They are perpetrators of the worlds greatest Ponzi scheme and most Americans know that. We do not need them and their bonuses to get us out of this mess.

Simple solution: Conduct the bank stress tests, find out who’s insolvent and who isn’t, and nationalize those that aren’t. We must proceed based on facts and the real truth.
Enough with the smoke and mirrors. That’s what got us here to begin with.

Posted by Michael Harrington | Report as abusive
 

The best outcome here is that the very reckless bankers that got us into this mess by raping and pillaging their own firms will now have trillions in US taxpayer funds to play with.

That is a grim “best outcome.”

Posted by SA Ramirez | Report as abusive
 

If you want to see what all these bailouts are going to do to our economy, Youtube an economist named Peter Schiff, Jim Rogers and a trends researcher named Gerald Celente. It will turn your blood cold.

Posted by Jeff | Report as abusive
 

This is still essentially the same old top-down “dribble-down” economic garbage of the past. It guarantees an income and a home and future for the good ol’ boys and leaves most people out in the cold. That is why the USA has TENT CITIES springing up everywhere. Having spent a couple of $$trillion, it is then effectively impossible to create a bottom-up solution. People who lose their jobs won’t be supported and people don’t have affordable heath care anyway. Many don’t even have homes now. That would never have happened if an economic stimulus rational had been followed from the beginning for those who need it the most. After all, these people ahve to spend whatever they receive so it quickly works up through the system. Now you have a failed society which can only ever expect to come back to its unequal equilibrium of the haves vs the have-nots. Its a disaster and your politicians and regulators are still all in deep denial.

Posted by Douglas Chalmers | Report as abusive
 

Remember spreading the wealth – Seem like a reversal – take what little the mid class has and give it to the wealthy. The only thing the bailouts are doing is prolonging the problem and making it worst for the mid class while the rich takes all rewards for failing. It time to get Wall Steelers out of the treasury and the Fed Reserve and stop catering to Wall Street(steelers) and start worring about main street America where buisness are dropping like flies. Wall Steelers aren’t going to fix your broken computer, house, car, nor provide other services products you may need, all they want is your money now and forever!

Posted by Morris | Report as abusive
 

Your article today by David Lawder, claiming that Wall Street caused the economic crisis, is just another example of dishonest, irresponsible reporting by the media. And if not dishonest, than completely stupid, and I’m not sure which is worse.

Reporters should at least make some effort to report the facts, instead of just repeating calculated deceptions from the Whitehouse and Congress, like some Jedi mind trick that only works on the weak minded. What next? Are we going to blame the Jews?

Good Grief!

Posted by Bruce Wells | Report as abusive
 

Dear Mr President

The latest toxic asset purchase plan that you announced is unnecessary waste of tax payer money. Your plan is only rewarding, saving, and protecting executives and shareholders of the banks in their gambling of customers’ and clients’ deposits and their failures.

This wrong incentive and action of rewarding failures and creating moral hazards will lead to more serious financial disasters in the near future, which can lead to riots and public disorders or even ethnic conflicts and wars within and among nations with resultant loss of a large number of lives and injuries.

The plan to purchase toxic assets should be condemned more so because any amount of economic recovery which will be slowly experienced in future through your fiscal stimulus measures will be wrongly attributed partially to your plan for purchasing the toxic assets from the banks.

The banks will only keep the money gained from the sale of the toxic assets instead of lending them because the banks will wait until the economic recovery begins and their profitable lending business can be resumed. That will take at least another two to three years when your fiscal stimulus package will take effects for economic recovery.

The money wasted on the purchase of the toxic assets should and could have been spent by adding the money to the direct fiscal stimulus to “actually” speed up the economic recovery.

All intelligent and logical people will view your plan of purchasing toxic assets from banks as a disguise to reward and compensate the banks’ executives and shareholders mixed with your fiscal stimulus plan for economic recovery.

It is morally, socially, ethically, and economically wrong because some less intelligent people will wrongly think that the economic recovery to be experienced in the future is party due to the plan to purchase the toxic assets: they will not realize the fact that the actual and the only cause of economic recovery are the fiscal stimulus and, to a lesser extent, the expansionary monetary policy (low interest rates).

Therefore, the American people and most people all over the world will view you as only representing the interests of special interest groups of bankers and shareholders of the banks instead of the American tax payers who voted you for the Presidency; The people have been betrayed. Your “change” slogan during the election campaign is only in words.

Yours sincerely,
rightandfair

Posted by rightandfair | Report as abusive
 

The Geithner Plan is flawed. It is unfair. It robs ordinary people and benefits people in Wall Street. It is a big gamble that favours Wall Street at the expense of taxpayers. It is immoral and unethical. No wonder Wall Street like the plan and DJ rose 7 percent. We must object to and protest against the plan.

Posted by Robert King | Report as abusive
 

I do not know how the Plan could work. The problem is that we have too much easy credit, loose credit that brought us the problem. And now we spend , spend and spend. We borrow and borrow billions and trillions of dollars. We will be in deficits for many years. How are we going to pay back? I am worried that politicians are making the problem worse by doing the wrong things, especially the Geithner PLAN.

Posted by Robert | Report as abusive
 

It hardly matters whether you bail out the banks or nationalise them, whether you reduce the interest rate or leave it as is. The underlying truth of the matter is that the First World is over-populated, over-employed, over-spending, over-borrowing and under-producing anything of tradeable substance. There is no quick fix. The unavoidable correction will plunge people into austerity and the mega rich will be reviled and create social unrest and crime. We are entering The Age of Utility and I saw it coming in the late 90′s.

Posted by rob alka | Report as abusive
 

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