Both the New York Times and the Wall Street Journal are reporting details of the Obama administration’s bank rescue plan, which the Treasury Department is expected to roll out this week. As anticipated, it will create private-public investment funds, in which Treasury will provide financing for private investors to purchase toxic assets:
The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.
These details officially show that Geithner is hinging the rescue plan on the assumption that toxic assets have an inherent economic value and are not, as many analysts believe, relatively worthless. So, as Paul Krugman pointed out, “the zombie ideas have won“:
The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
As we’ve discussed before, if Geithner’s assumption is right, then the plan could work. However, if he is wrong — as many feel he is — then he is creating a situation in which investors can cherry-pick truly depressed assets and leave the rest of the junk behind, thus making a huge, government subsidized profit without fixing the problem.