Can Geithner’s public-private partnership get it done?
Edward Harrison of Credit Writedowns, posted this article on NakedCapitalism.com which dissects the government’s plan to buy up to 1.4 trillion dollars worth of toxic assets that are clogging up the banks balance sheets. This is an effort to stimulate the credit market, that if successful should partially revitalize the economy and reduce the fear of both lenders and consumers. In Harrison’s words “To cut to the chase, I believe this strategy could be successful in rekindling some increasing credit liquidity and, therefore, some consumer demand.” This program which runs the risk of inflation and catastrophic consequences has many opponents, but for now this is the course of action President Obama and his staff are going with. So at this point, whether you like it or not this is happening.
This program reflects a socialistic change, and at this point the American public will eat up anything that has the word change associated with it. Harrison looks at four factors that will eventually decide our aggressive President’s fate. “The success of Geithner’s plan, the efficacy of the economic stimulus, ability to connect with the disenfranchised, and the will-in setting political agenda,” are the four crucial factors. First and foremost Geithner’s much criticized plan is essentially a miss or hit plan, and its failure could cloud our President’s term. Not to mention the reluctant support of this plan would essentially cease to exist if the administration prepares for another round of money pumping.
I have said often that Obama’s stimulus will not be sufficient given the state of the economy. Recently revised budget projections from the Congressional Budget Office confirm this — the budget deficit, therefore, will be significantly worse than originally projected. Nevertheless, the Japanese experience in the 1990s demonstrates that even a depressionary economy can experience brief respites from economic turmoil. This could be Obama’s saving grace.
The stimulus plan which has also been embraced with mostly ridicule, will be a crucial component in establishing credibility for President Obama’s administration. What concerns me more is a man that based his entire campaign on bringing change hasn’t deviated much from the norm. If you ask me the ”too big too save” mentality has crippled Capitalism. Rather than letting these financial institutions fail, and letting the market hit a bottom we are prolonging economic stability. Also the president’s barrage of bailouts, have perhaps willingly aligned him with Wall Street rather than Main Street. It is only a matter of time before our humble president’s agenda is brought into question.
In my view, the Obama Administration, through its actions to date, has already politically cast its lot with the monied class. On Obama’s watch, we have the Citigroup situation, the Bank of America bailout, the Merrill Lynch bonus scandal, the AIG bailout and bonus scandal, the furore over golf tournaments and the backdoor bailouts under TALF and the Public-Private Partnership. All of these events demonstrate a transfer of wealth from taxpayers to the monied interests of the financial sector. Yes, none of these events individually is a fatal problem. However, taken as a collective, the preponderance of evidence points toward an Administration which will increasingly be seen as more aligned with Wall Street than Main Street. This is a catastrophe for a man who campaigned on “Change you can believe in.”
Moving back to our analysis of the new public-private partnership plan, it s truly in my opinion a bit too optimistic. Now first of all the program heavily relies on its ability to draw interest from the private sector( private investors, hedge funds etc…). The administration plans to accomplish this by offering low interest financing and also harboring a substantial amount of any potential losses. However, this plan revolves around creating a market for the toxic assets, but it seems as if the government is failing to accurately account for how bad these assets truly are. Meredith Whitney formerly of AIG who called this crisis in the summer has approximated these assets to be about 7-8 trillion. Not to mention the administration has failed to take into account further bad news from other financial sectors. The crisis which eventually initiated only in the subprime mortgage market, spread like wildfire through the disturbingly unregulated financial derivatives market.
Unfortunately, Geithner’s view is not a correct interpretation of events. While prices have declined considerably in a number of markets, often to excessively low levels, there are many other assets which will become impaired going forward or have been impaired, but have yet to be written down. Commercial Real Estate, credit cards and prime mortgages are all distressed markets where one should anticipate further writedowns. So, even if the Treasury’s interpretation of events is correct — that many asset prices have fallen too far — it is irrelevant because there are so many more writedowns still to come.
What I fear most is that if this plan fails Obama might not get another chance. On the administation’s part I think they need to start living up to the promises they made. President Obama said his battle to revive the economy would be transparent. So far it has been anything but that, it is harder than ever to assess what his happening behind the closed doors of the Oval office. Perhaps he should also avoid speaking four times a weak, especially with the market swinging like a pendelum on his every word. I am siding with Harrison’s view of being “on-board” with this plan purely because it’s happenng and this might be our only shot at a resolution. So as the world anticapates the end of this recession I shall be watching along, with my fingers crossed.
