Tuesday, April 07, 2009

Geithner-Summers Plan : Jeffrey Sachs

The Geithner-Summers Plan Is Even Worse Than We Thought

by Jeffrey Sachs

Director of the Earth Institute, Economics Professor,
Columbia University

Two weeks ago, I posted an article showing how the
Geithner-Summers banking plan could potentially and
unnecessarily transfer hundreds of billions of dollars
of wealth from taxpayers to banks. The same basic
arithmetic was later described by Joseph Stiglitz in
the New York Times (April 1) and by Peyton Young in the
Financial Times (April 1). In fact, the situation is
even potentially more disastrous than we wrote.
Insiders can easily game the system created by Geithner
and Summers to cost up to a trillion dollars or more to
the taxpayers.

Here's how. Consider a toxic asset held by Citibank
with a face value of $1 million, but with zero
probability of any payout and therefore with a zero
market value. An outside bidder would not pay anything
for such an asset. All of the previous articles
consider the case of true outside bidders.

Read the entire piece at the Huffington Post.
Cynics believe that the Geithner-Summers Plan is
exactly what it seems: a naked grab of taxpayer money
for Wall Street interests. Geithner and Summers argue
that it's the least bad approach to a messy situation,
in which we need to restore banking functions but don't
have any perfect ways to do that. If they are serious
about their justification, let them come forward to
confront their critics and to explain to the American
people why the other proposals are not being pursued.

Let them explain the hidden and not-so-hidden risks to
the American taxpayer of the plan that they have put
forward. Let them explain why they are so intent on
saving the banks' bondholders, even the long-term
unsecured creditors who clearly knew they were taking
market risks in buying Citibank bonds. Let them work
with their critics to fashion a less risky and less
costly plan. So far Geithner and Summers tell us that
their plan is the only option, but without a word of
further explanation as to why.
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