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The Flim-Flam

Smart people differ on how successful Tim Geithner’s private-public plan for cleaning out the banks’ toxic assets will be. Will banks refuse to sell unless guaranteed a minimum price? Will the problem of evaluating these assets doom the process? We’ll have to see. But one thing is clear: this is not a very good deal, and certainly not a transparent one for taxpayers. Jeffrey Sachs explains:

T he Geithner-Summers plan, officially called the public/private investment programme, is a thinly veiled attempt to transfer up to hundreds of billions of dollars of US taxpayer funds to the commercial banks, by buying toxic assets from the banks at far above their market value. It is dressed up as a market transaction but that is a fig-leaf, since the government will put in 90 per cent or more of the funds and the “price discovery” process is not genuine. It is no surprise that stock market capitalisation of the banks has risen about 50 per cent from the lows of two weeks ago. Taxpayers are the losers, even as they stand on the sidelines cheering the rise of the stock market. It is their money fuelling the rally, yet the banks are the beneficiaries.

Why all this subterfuge (“flim-flam” Sachs calls it)? You think it would be easier and more honest simply to ask Congress for the money to buy the assets outright. That’s what the original TARP was all about, undisguised by this intricate web of taxpayer subsidies. But there’s the rub. Sachs argues:

Tim Geithner, Treasury secretary, and Lawrence Summers, director of the White House national economic council, suspect that they cannot go back to Congress to fund their plan and so are raiding the Federal Reserve, the Federal Deposit Insurance Corporation and the remaining Tarp funds, hoping that there will be little public understanding and little or no congressional scrutiny. This is an inappropriate institutional use of the Fed, the FDIC and the Tarp. Mr Geithner and Mr Summers should at the very least explain the true risks of large losses by the government under their plan. Then, a properly informed Congress and public could decide whether to adopt this plan or some better alternative.

So to avoid the overwhelming popular objection to perpetual bailouts and expenditures, the Obama administration will do this all “off budget” and with no hearings, Congressional debates, or votes. Not very transparent and quite imperious, when you get right down to it.

Now imagine a Republican President wanted to run a massive subsidy for financial institutions with no Congressional oversight or appropriation. You’d hear populist howls, not to mention the complaints about the executive branch run amok. Come to think of it, that’s pretty much how the entire financial recovery and bailout operation is being conducted — with no Congressional appropriation of funds, no checks and balances, and no taxpayer guarantees. (Yes, George W. Bush started this with the car bailouts, to which some of us objected strenuously on just this basis.)

It might all “work” (or not — who knows?), but at what price — monetarily and Constitutionally?



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