Geithner’s Plan Creates An Unnecessarily Subsidized Market In Toxic Assets

Treasury Secretary Timothy Geithner’s Private-Public Investment Program is both good and bad. My new column takes a look:

The Treasury Department has created a bit of a conundrum for libertarians when it comes to the newly announced Jekyll and Hyde-like TARP II. On the one hand, the government is finally reaching out to the private sector through this initiative, recognizing the power of markets and price discovery as means to end the economic crisis. But on the other hand, the taxpayers are still taking up to 93 percent of the risk in this new venture. That’s hardly an equitable solution and it could end up costing incalculable billions…

Though the TARP II program creates a market for buying and selling these assets, it’s an unnecessarily subsidized one. These assets can be bought and sold now, in the current market. The catch is that the banks don’t want to because they don’t like the prices they are being offered, and bailouts have allowed them to hang on for a better deal. The best option is simply to let the banks that do not want to sell fail, and then divest the assets after going into bankruptcy.

There are other risks with the plan, including the possibility that banks will bid up their own auctions, but this can be stopped with the right oversight. The gravest concern is that there are high odds that many of the toxic Legacy Assets might never regain value, leaving the taxpayers with a heavy loss that should be felt by the banks.

Full Column Here