Geitner's Game

Brad DeLong's latest swig of Timmy's Kool Aid reduces me to incoherent fury. Fortunately, his commenters do a good job of exposing the fallacies he has incorporated. Meanwhile, Kevin Drum describes the plans the big banks already have for gaming the system.

US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.

....Wall Street executives argue that banks’ asset purchases would help achieve the second main goal of the plan: to establish prices and kick-start the market for illiquid assets. But public opinion may not tolerate the idea of banks selling each other their bad assets. Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.

The principle is simple: borrow money from the taxpayers to buy the toxics from each other at a high price, sell the toxics at their real nearly worthless value, and default on the no recourse loans from the taxpayers. Stockholder, bondholders, banks, every body wins - except for the taxpayers, who are left with the losses.

Meanwhile, it seems that the President has had a message for the bank CEOS:

"My administration," the president added, "is the only thing between you and the pitchforks."

And here's a message from the pitchforks: Out of my way, please!

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