Obama's toxic asset transfer plan is itself toxic

"In his review of the Geithner-Summers Plan to remove toxic assets from the banks, NY Times columnist Joe Nocera writes (March 28, p. B8), "As for the complaint that it will make rich guys richer, well, you can't win 'em all." If Nocera had looked at alternatives that many of us have been suggesting and if he still concluded that helping rich guys get richer was the only conceivable strategy, his attitude might be acceptable. But he does no such thing. He did not explore alternatives. Nor did he explain to his readers that the taxpayer transfers to make "rich guys richer" could amount to tens, or hundreds, of billions of dollars of the public's money, massive transfers that are avoidable.

Geithner and Summers are proposing to use government loans to finance investors to buy toxic assets. This is fine. The question is the terms. If the loans were going to large and well-capitalized investment funds, whose overall capital base would back the repayment of the government loans, the plan would have merit of providing liquidity to the market for toxic assets. Instead, the government loans by design will go to poorly capitalized special investment funds set up specially to buy toxic assets. The approach is tailor-made to leave the FDIC and Fed with massive losses. Since the taxpayer losses will be hidden on the balance sheets of the FDIC and Fed, the tens or hundreds of billions of dollars of taxpayer losses will not be recognized until the program is long forgotten by the public."