Monday, March 30, 2009

The Geithner Plan: A 21st Century New Deal?

Is US Treasury Secretary Timothy Geithner’s plan to heal the ailing US economy by rescuing US banks this century’s New Deal or, as his critics attests, a road to hell?

By: Ringo Bones

It is now official, US Treasury Secretary Timothy Geithner’s plan to heal the ailing US economy by detoxifying American banks of their toxic assets is already underway. The plan primarily involves a public and private sector team-up investment program to buy toxic assets / financial products, the primary cause of the subprime mortgage crisis. The scheme will initially funded by the US Government with 500 billion dollars worth of funds to buy the toxic assets with the potential to expand to 1 trillion dollars - if needed - over time. While the US Federal Reserve and the FDIC will assist investors in buying assets, the private sector will share the risk with the US taxpayers. Though the creation of the “equitable” market price of these assets needs really diligent oversight, which could be a problem.

Now the downside, the overall risk exposure of the American taxpayer is still not well established by the “Geithner Plan”. Which is not exactly easy because most American banks are still vilified for their risky behavior that instigated the subprime mortgage crisis. Plus, there is that issue whether capital restrictions govern the pricing of the assets. In short, the “equitable” value of the toxic assets still needs evaluation. Worse still, the scheme can easily privatize the corporate gains while the losses are socialized – i.e. the American-taxpayer-as-investor can easily be left holding the bag if the scheme turns sour.

In spite of the plan’s caveats, world markets reacted positively to the Geithner Plan. The day after the plan’s inception, stock markets rallied. Not just in Wall Street but also in other parts of the world as well, especially in Asia. Although the Czech Prime Minister Mirek Topolanek – who is also currently the EU president under it’s rotating 6-month term - criticized the “Geithner Plan” as the “road to hell” for the global financial system. Maybe quantitative easing is too complex to be policed properly from PM Topolanek’s point of view?

The good thing about the “Geithner Plan” is that it renewed the sense of urgency to regulate financial companies who provide complex and exotic financial services and instruments. Like hedge funds and credit default swaps just to name a few. Plus, the renewed assessment of financial companies’ practice of keeping adequate credit reserves to back up their inherent operational risks (a localized Basel Accord?). The question now is whether governments around the world will become too obsessed with quantitative easing that they’ll forget there are other things to take care of during times of economic crisis like maintaining employment opportunities, the environment and other social concerns.

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