Last week, Dan Gross at Newsweek wrote a fun piece on Slate/Newsweek called “Jump” (not a a correlation with the old Van Halen song). Basically he says that nothing the government can do will fix the economy unless we participate.
In the grips of a bubble mentality, we—as investors, consumers, and businesses—blithely assumed risk and convinced ourÂselves it was perfectly safe to do so. We bought houses with no money down, took on huge amounts of debt, and let the booming stock and housing markets perform the heavy lifting of saving.
I remember the ridicule the former president took for his previous economic fix after 9/11 – “Shop!” else we enter the “paradox of thrift.“
If everyone saves during a slack period, economic activity will decrease, thus making everyone poorÂer. We also need to start investing again—not necessarily in the stocks of Citigroup or in condos in Miami. But rather to build skills, to create the new companies that are so vital to growth, and to fund the discovÂery and development of new technologies.
I am not suggesting that shopping is solution, but it is certainly part of the problem right now. When consumers and investors hunker down and do nothing, a failure spiral results.
Today Secretary Geitner announces the plan we have been waiting for, which is heavily reliant on the private sector. US Treasury secrectary Geitner unvailed his second attempt at getting the economy moving again and this time there is probably no room for a do-over. Did he really call it “My Plan”?
We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little. In working with Congress to put in place strong conditions to prevent misuse of taxpayer assistance, we need to be very careful not to discourage those investments the economy needs to recover from recession. The rule of law gives responsible entrepreneurs and investors the confidence to invest and create jobs in our nation. Our nation’s commitment to pursue economic policies that promote confidence and stability dates back to the very first secretary of the Treasury, Alexander Hamilton, who first made it clear that when our government gives its word we mean it.
Of course Hamilton was shot dead in a duel. Let’s hope this strategy has a quicker draw and better aim.
Here’s the official press release and fact sheet posted this morning.
Here’s the problem with the AIG bonus outrage that fueled this modification of plans – it’s not about being scared of keeping AIG and other Wall Street firms afloat and it’s not about the obscene lack of morality – it’s about the danger of scaring off the private sector from participating in the solution. It’s called “Free Market.”
Council of Economic Advisers Chief Christina Romer said:
“We’ve got banks with a lot of toxic assets, what ‘toxic’ means is they are highly uncertain … so that is certainly the big picture, and that is going to be the main reason for doing this … We simply — we simply need them. We need them — you know, we’ve got a limited amount of money that the government has to go in here, so we need to partner, not just with private firms, but with the FDIC, with the Fed, to leverage the money that we have,”Â she said.
$165M AIG bonuses (actually it’s $218M) and it’s symbolism of greed have been a distraction and we have to be very careful of taking our eye off the ball. Cut out the “Main Street versus Wall Street” homilies and let’s fix this.
Congress underestimated consumer outrage and the House quickly passed retribution legislation to get even via a 90% tax. Because the political playing field is incentivized by one-upsmanship, Congress is much more comfortable with this sort of grandstanding/finger pointing and that’s what this debate has regressed to. Dodd is in hot water.
It began with the previous legislation of caps on Wall Street compensation (when Congress didn’t catch it), while a feel good measure, is also a short sighted position much more apparent now because there will always be work-arounds.
I love how many simply lump all Wall Streeters into one evil pile and feel it’s right to treat everyone the same. It’s professional prejudice on steroids. A market for the “toxic” assets needs to be fostered. Do we want to get out this mess or not? No room for populist shortsightedness.
More on the plan later. In the meantime I need to download that song from iTunes – it’s systemic so we might as well jump.
Tags: Dan Gross, FDIC, Forbes, Wall Street Bonus, Tim Geithner, Bailout Nation
Let them fail. Liberate the capital so it can be redistributed to those who will put it to good use. This is the foundation of a free market. Anything else is welfare.
I’m not sure Geithner’s plan is actually “heavily reliant on the public sector”. Most of the money here comes from the government. And isn’t this just the same plan Paulson tried to weasel past everyone last year? Seems like more privatizing gains and socializing losses. Why are they so afraid of socializing the gains too? I mean, I know. But come on.
So toxic means uncertain? And we can’t have that any more? Hasn’t everything, including life itself, always been uncertain? I thought interest rates, in part, took care of uncertainty, or the risk wasn’t taken.
2nd question, how do they know which ones are uncertain and who decides which ones are uncertain to the extent of toxicity?
3rd, who gets the certain assets?
4th, is Geithner buying the toxic assets at the value the bank says or does somebody else value them? BPO or MAI appraisal?
And finally, is a toxic asset a mortgage, some kind of mortgage derivative or whatever the bank doesn’t want any more?