bank bailout...
while a whole bunch of liberal/left economists don't think it's such a great idea
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http://blogs.ft.com/economistsforum/2009/04/the-geithner-plan-criticisms-are-off-the-mark/The Geithner plan: criticisms are off the mark
April 7, 2009
By Michael Spence
Depending on who you ask, the pubilc private investment programme announced by Tim Geithner is either part of a solution to today’s banking crisis or an aggravator of the problems. This debate will likely widen as the US government moves from the design stage to implementation.
What are the key features of the Geithner plan? Government and private investors put in equal amounts of equity; this is supported by the provision of cheap leveraging through government debt (up to six times leverage); and the government provides a non-recourse feature equivalent to a put option in case that the ultimate value of the package of securities turns out to be less than a pre-specified amount. The purpose of this feature is to take away the risk of a large loss of the investor. It is insurance against the left tail outcomes. In return for the put the government takes warrants which add to its equity fraction in case the final value is greater than the debt. Sellers auction packages to the buyers. The private investors in the buying entity (with the government) set the bid prices.
Markets reacted well to Mr Geithner’s efforts to line up capital, financing and management expertise in order to liquefy the market for legacy assets residing on banks’ balance sheets, thereby facilitating their lending activities.
At the same time, in widely-publicised remarks, several prominent economists criticised the plan, arguing that it provides government/taxpayer “cash for trash,” constitutes a huge giveaway and robbery of the US taxpayer. This is a mistaken view. It is based on an assumption that debt will be overused by the government and the participants in cases where the left-tail or downside risk is very high.
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The criticisms seem to assume that all the packages are trash (in slightly more technical terms, low value relative to book and high variance or fat tailed) in which case the use of non-recourse debt automatically involves a significant taxpayer transfer to some combination of the buyers and sellers, mostly sellers.
If the critics are right that all the packages will turn out to be high risk (often measured by the variance) and if the government implements properly then there won’t be much leverage in the observed outcomes.
The reason this is important and not just technical, is that stabilising the financial system is going to require a complex set of government and central bank initiatives undertaken with imperfect knowledge of consequences.
That challenge is going to be much harder with a competent and well-intentioned government (which we have) if our fellow citizens who are understandably confused and very angry, think the government is trying to bail out the financial sector and doing it in a surreptitious way.
Michael Spence received the Nobel Prize in economics in 2001 and is chairman of the Commission on Grown and Development
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Michael Spence is a Senior Fellow at the right wing Hoover Institute.
edit - added link