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Obama's Latest No Banker Left Behind Scheme
By Stephen Lendman (about the author) Page 3 of 7 page(s)
"The investment funds will have the following balance sheet. For every $1 of toxic assets (bought), the FDIC will lend up to 85.7 cents, and the Treasury and private investors (only) 7.15 cents in equity to cover the remaining balance. FDIC loans will be non-recourse, meaning that if the toxic assets (bought) fall in value below the amount of FDIC loans, the investment funds will default on the loans and the FDIC will end up holding the toxic assets...."
In other words, "The FDIC is giving a 'heads you win, tails the taxpayer loses' offer to private investors.' " Economist Paul Krugman agrees calling it a one-way bet, "a disguised way to subsidize purchases of bad assets."
Economist James Galbraith calls it another massive "ineffective" giveaway to banks with taxpayers getting hosed from a repackaged trash removal scheme that's been around since last fall when Geithner, as New York Fed president, planned it with Wall Street CEOs. They see it as a temporary liquidity problem (which it's not) so the idea is to clean up the system and get banks lending again. But here's the rub:
"If Geithner's plan to fix the banks would also fix the economy," maybe the idea makes sense. "But no smart economist we know thinks that it will." It's a giant swindle, but that aside, Geithner has "five fundamental misconceptions:"
(1) The trouble with the economy is that banks aren't lending, he says.
In fact, it's because businesses and mainly households are way over-extended and "are now collapsing under the weight of it. As consumers retrench (of necessity), companies that sell to them (must also), thus exacerbating the problem. The banks, meanwhile, are lending," just not as much as they used to.
"Also, the shadow banking system (securitization markets), which actually provided more funding to the economy than the banks, has collapsed."
(2) The banks aren't lending because their balance sheets are loaded with 'bad assets.'
In fact, "banks aren't lending (enough) because they have decided to stop making loans to people and companies who can't pay them back" or don't want more loans in the first place. They're also scared that new debt will cause more write-offs, greater losses, and the threat they'll be wiped out entirely. So their strategy is hunker down and wait for a better time to do business.
(3) Bad assets are "bad" because the market doesn't understand how much they're really worth.
In fact, they're bad because "they are worth (lots) less than banks say they are." A major factor is the near-30% drop in house prices wiping out over $5 trillion in valuations. Lenders want households to take losses because if they do it themselves they'll be wiped out. So PPIP arranges it for them.
(4) Once "bad assets" are off balance sheets, banks will start lending again.
In fact, banks will stay cautious until the housing market and economy improve. So far, that's nowhere in sight.
(5) Once banks start lending, the economy will recover.
In fact, house prices are falling, savings have been wiped out, huge job losses are continuing, and "consumers will have debt coming out of their ears" that will take years to work off.
The views expressed in this article are the sole responsibility of the author
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