March 21, 2009
Don’t Hate Me, But I Kind of Agree

Posted at 4:58 pm, in: Bailout

The New Yorks Times had this to report:

The Treasury Department is expected to unveil early next week its long-delayed plan to buy as much as $1 trillion in troubled mortgages and related assets from financial institutions, according to people close to the talks.

The plan is likely to offer generous subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government to buy toxic assets from banks.

To help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders.

The uproar over the American International Group’s bonuses has not stopped the Obama administration from plowing ahead. The plan is not expected to impose restrictions on the executive pay of private investors or fund managers who participate.

Little did I realize that the Obama Administration would be screwing up so badly, and so quickly, that I would be agreeing with the opinion page of the NYT:

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. 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.

Love me or hate me, love or hate Paul Krugman, but I think he might be right about this one. I’m not sure I completely agree with this man, and I’m sure we wouldn’t agree on the solution to this problem, but I have mentioned something about these government created moral hazards before.

I know, I feel a little dirty, now. Let me go scrub off the filth.