The New Geithner Toxic Asset Plan

March 22, 2009 at 11:26 pm · Filed Under Broader Market, The Economy 

I’m not a fan of most of the current economic policies, and at least I know Paul Krugman, the Nobel Prize winning economist, isn’t either. 

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.

Basically, people are refusing to believe that the toxic assets held by the banks are indeed worthless.  By continuing to back these assets, it’s just racking up a huge bill for the taxpayers that will keep snowballing until they cut their losses.  We’re basically playing with a martingale strategy — given an infinite bankroll we could actually break even since the toxic assets will eventually be valued correctly.  The only problem is that we don’t have an infinite bankroll, so eventually we could find ourselves at the point that we can’t double up anymore and we’ll have to eat a catastrophic loss. 

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