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Geithner’s Plan: Getting the Values Right March 22, 2009

Posted by Dwight and Lynn Furrow in Current Events, Dwight Furrow's Posts, Ethics.
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Treasury Secretary Tim Geithner’s plan to rescue the banking system is due to be released today. Details of the plan have been leaking all weekend, and it should come as no surprise that there is no consensus among economists (or at least the one’s I read) on whether it is a good plan or not.

Paul Krugman called the plan “an awful mess”

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives… For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

But Brad Delong is more smitten:

So why do I have a positive and Paul a negative view of the Geithner Plan? I see three reasons:

1. The half empty-half full factor: I see the Geithner Plan as a positive step from where we are. Paul sees it as an embarrassingly inadequate bandaid.

2. Politics: I think Obama has to demonstrate that he has exhausted all other options before he has a prayer of getting Voinovich to vote to close debate on a bank nationalization bill. Paul thinks that the longer Obama delays proposing bank nationalization the lower it’s chances become.

3. I think the private-sector players in financial markets right now are highly risk averse–hence assets are undervalued from the perspective of a society or a government that is less risk averse. Paul judges that assets have low values because they are unlikely to pay out much cash.

In fact, Delong’s entire FAQ is worth reading if you want a brief, clearly written analysis of the plan.

I’m not an economist so dear reader beware. But, as I sort through the various opinions of economists, it seems to me some of the disagreement is about values, not technical economic issues.

Some people emphasize the fact that this scheme throws more taxpayer money at the same dingbat scumbags who got us into this mess. The government will insure overpriced assets that will have little value in the future, and we will end up once again rewarding investors for their bad bets. This is fundamentally unfair and unjust. These folks don’t like the plan.

Others emphasize the chance that this plan will get the bad assets off the bank ledgers and encourage more lending, giving consumers more buying power and firms less reason to lay off workers, thereby (hopefully) stanching economic decline. These folks like the plan a lot more.

I think both sides are right on the economics. It seems to me that there is plenty of incentive for investors to buy these assets since the government will limit their losses if they go bad. That is good and should provide further stimulus to the economy. They also have an incentive to bid up the price of the assets since they don’t have to put a lot money on the table to acquire them. That is bad because undoubtedly the taxpayers will have to pay up.

No one knows if this will work or not, and my economics crystal ball shattered many decades ago. But the moral philosopher in me would rather sacrifice a little justice and fairness to avoid the misery that a prolonged recession (or worse) entails. So independently of the economic issues, I think the administration gets the value question right.

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Comments»

1. James Gray - March 27, 2009

I don’t know how a moral philosopher can decide this easily. taking people’s money without their consent is a form of stealing (property rights violation).

And short term reform can lead to long-term suffering. We need a long-term perspective. Sure, we want to minimize suffering, but does reducing suffering now count more than reducing suffering in the future?


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