Tuesday, February 10, 2009

Economists React: Treasury Announcement Fails to Satisfy

Perhaps the centerpiece of today’s announcement is the commitment up to $1 trillion to revivify the collapsed market for securitized debt that previously allowed unprecedented levels of lending in the home, auto, student, and credit card sectors. Geithner makes the false assumption securitization is a prerequisite for healthy markets. Our nation’s short history with widely securitized debt has simply shown that the process can lead to massive mispricing of assets and risk. But, in the worldview of Geithner and his fellow economists, credit, rather than savings, is central figure in the economic equation. In his mind, anything that eases the process of lending is an end in itself. in so doing this plan guarantees that the U.S. economy will be pushed farther and farther out on a leveraged limb, until no amount of market medicine can prevent a total economic collapse. Peter Schiff, Euro Pacific Capital

It’s really not clear what the plan means; there’s an interpretation that makes it not too bad, but it’s not clear if that’s the right interpretation. The plan deserves praise for what isn’t in it, at least as far as I can tell. There doesn’t seem to be provision for mass purchases of toxic waste at premium prices; there also doesn’t seem to be a massive “ring-fencing” guarantee against private losses on bad assets. In that sense the plan is better than what the last few weeks of leaks led us to expect… So what is the plan? I really don’t know, at least based on what we’ve seen today. But maybe, maybe, it’s a Trojan horse that smuggles the right policy into place. Paul Krugman, Princeton University

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