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The Geithner / U.S. Treasury plan for save the economy, explained for us laypeople

yllus

Elite Member & Lifer
Aug 20, 2000
20,576
431
126
Weekly political summary rag The Week is fast becoming my go-to source for what's going on in the world. Here they have a question and answer session with Prof. Brag Delong of UC Berkeley, previously with the U.S. Treasury as a deputy assistant secretary for economic policy.

I've cut up the full article somewhat, as it also goes into what is wrong with the economy in addition to the following explanation of the plan to solve it. I thought it was all worded in simple and clear enough terms to be worth sharing with everyone. Enjoy!

The crisis -- and Geithner plan -- explained

Q: But at least some economists know how to fix this, right?

A: We think so. We recommend four things:

(a) The Federal Reserve should purchase Treasury bonds for cash in as large a quantity as needed to push their prices up as high as possible. For if Treasury bonds are expensive, then investors will likely shift some of their demand to mortgage and corporate bonds, push up their prices somewhat;

(b) Even after the Federal Reserve has pushed Treasury bond prices as high as they can go, it should keep buying Treasury bonds for cash in the hope that if people's pockets are full of cash, they will spend more of it, and that extra spending will directly pull people out of joblessness and into employment;

(c) The government should run big, even extra-big, deficits so that its spending--like the government's wave of spending during World War II, like the wave of spending that followed the Reagan tax cuts of 1981, like Silicon Valley's wave of spending during the late 1990s, like the wave of spending on housing in the 2000s -- will also directly pull people out of joblessness and into employment; and

(d) The government should undertake additional measures to boost financial asset prices and thus make it easier for those firms that ought to be expanding and hiring to obtain finance on terms that allow them to expand and hire.

Q: "Additional measures to boost financial asset prices"?

A: Of which the Geithner Plan is one part. The Geithner Plan is to take about $465 billion of government money, combine it with $35 billion of private-sector money, and use it to buy up risky financial assets.

Q: Why is the government making the private sector kick $35 billion into this $500 billion fund?

A: So that they have skin in the game. The Treasury doesn?t want them taking excessive risks with taxpayers' money, buying financial assets at more than their long-term hold-to-maturity value, for example. So it?s requiring that private investors put some of their own money on the line, as well.

Q: Why should private-sector investors be willing to kick in $35 billion?

A: Because they stand to make a fortune if and when markets recover and financial asset prices rise toward normal values. The government will be taking $13 billion a year out of the fund off the top in interest, and splitting the remaining profits with the private-sector fund managers.

If the fund does well over the next five years?returning profits, say, of nine percent per year-- then the private investors get (a) a rate of return on their super-risky equity investment of 14 percent, plus (b) the equivalent of an "annual management fee" equal to two percent of the capital under management. If the portfolio does less well?say, profits of four percent per year-- they get a still-healthy but sub-market return of 10 percent per year on their equity.

And if the portfolio does badly--loses one percent per year?they still have to pay back their loans from the FDIC and consequently lose 5/7 of their investment. Those are attractive odds.

Q: Isn't this just a massive giveaway to financiers?

A: Whether the financiers who invest in and run this program will make fortunes time alone will tell. But they will be a different set of financiers than those who got us into this mess. And if they make fortunes, they will make the government a bigger fortune.

A "management fee" of two percent of assets under management per year is one that many sophisticated investors have been willing to pay to private hedge funds, and they have topped it off with an extra 20 percent of annual profits ? a fee the Treasury won?t be paying.

Q: So the Treasury is doing this to make money?

A: No: making money is a sidelight. The Treasury is doing this to reduce unemployment.

Q: How does having the U.S. government invest $500 billion in the world's largest hedge fund operations reduce unemployment?

A: The sudden appearance of an extra $500 billion in demand for risky assets will reduce the quantity of risky assets other private investors will have to hold. And the sudden appearance of between five and ten different government-sponsored funds making public bids for assets will convey information to the markets about what models investors are using to value assets in this environment. That sharing of information will reduce the perception of risk somewhat.

When assets are seen as less risky, their prices rise. And when there are fewer assets on the market, their prices rise too: it?s simple supply and demand. With higher financial asset prices, those firms that ought to be expanding and hiring will be able to get money on more attractive terms that make expanding and hiring more profitable, etc.

Q: Oh.

A: The administration will do more. This plan consumes $100 billion of second-tranche TARP money. But there is a potential second-round stimulus in September. And there is still $250 billion more left in the TARP to be used in other ways.

Q: What if this goes wrong? What if the public-private investment portfolios don't earn nine percent or four percent per year -- or even lose value at one percent per year? What if instead they lose value at a rate of 10 percent per year so that in five years the government loses half its money?

A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.
 

Vic

Elite Member
Jun 12, 2001
48,521
9,497
126
I find it interesting that the proposed economic plan from a so-called 'Marxist' or 'socialist' administration looks in every way exactly like textbook Smithian capitalism.
 

JSt0rm

Lifer
Sep 5, 2000
27,399
3,942
126
man you neocons that talk a big game could be eating your shoes if this thing works out. I wont begin to make predictions in this climate but a lot of you enjoy it enough and if you are wrong on this the republican party will be in for even more hurt. Seems like a risky position to take.
 

CADsortaGUY

Lifer
Oct 19, 2001
25,162
1
76
www.ShawCAD.com
Originally posted by: JSt0rm01
man you neocons that talk a big game could be eating your shoes if this thing works out. I wont begin to make predictions in this climate but a lot of you enjoy it enough and if you are wrong on this the republican party will be in for even more hurt. Seems like a risky position to take.
Yeah, because obviously "neocons" have so much to do with this...

Whether it "works" or not(and they'll claim it "works" regardless of reality) doesn't matter, it's a principle thing.
 

JSt0rm

Lifer
Sep 5, 2000
27,399
3,942
126
Originally posted by: CADsortaGUY
Whether it "works" or not(and they'll claim it "works" regardless of reality) doesn't matter, it's a principle thing.
Ohh so you would drive the country into a depression on principle. ok thats a good plan.

And are you guys not neocons anymore? I don't get the mailer so I didn't hear about the change
 

microbial

Senior member
Oct 10, 2008
350
0
0
Originally posted by: JSt0rm01
man you neocons that talk a big game could be eating your shoes if this thing works out. I wont begin to make predictions in this climate but a lot of you enjoy it enough and if you are wrong on this the republican party will be in for even more hurt. Seems like a risky position to take.
GOP just wants America to fail, as enunciated so eloquently by their grand leader Rush.

The Republican budget alternative can be more easily explained: picture two diagram circles connected.

First one has the text "RAT" written inside
The other has the text "FUCKING"

What's so hard to understand about that...
 

alchemize

Lifer
Mar 24, 2000
11,489
0
0
(a) The Federal Reserve should purchase Treasury bonds for cash in as large a quantity as needed to push their prices up as high as possible. For if Treasury bonds are expensive, then investors will likely shift some of their demand to mortgage and corporate bonds, push up their prices somewhat;
Artificially deflate mortgage rates, hoping to slow/stop the housing market decline/foreclosures and get people borrowing again. Of course, the problem is, people can't afford to borrow anymore and haven't been able to for some time. In other words, try and re-inflate the bubble. Positives? SOME people will refi and stay out of foreclosure. But it isn't going to help bus drivers in $800K houses that are really worth $400K (or less)


(b) Even after the Federal Reserve has pushed Treasury bond prices as high as they can go, it should keep buying Treasury bonds for cash in the hope that if people's pockets are full of cash, they will spend more of it, and that extra spending will directly pull people out of joblessness and into employment;
See previous statements. As an aggregate, we don't have much cash anymore. Look at personal savings. It was all an illusion based on credit card and home equity debt. Household debt = annual GDP. Think about that for a minute.

(c) The government should run big, even extra-big, deficits so that its spending--like the government's wave of spending during World War II, like the wave of spending that followed the Reagan tax cuts of 1981, like Silicon Valley's wave of spending during the late 1990s, like the wave of spending on housing in the 2000s -- will also directly pull people out of joblessness and into employment; and
Well we got those fucking extra-big deficits covered. In other words, create a new bubble. The government debt bubble. Whee!

(d) The government should undertake additional measures to boost financial asset prices and thus make it easier for those firms that ought to be expanding and hiring to obtain finance on terms that allow them to expand and hire.
Boost financial asset prices? Oh yah, create/reinflate another bubble...yah, give the fucking money to citibank and chase and goldman sachs, they did such a great job last time.

They should be destroying the large banks and divvying up their assets to regional/local banks who actually know their customers and know the real value of those assets.
 

JSt0rm

Lifer
Sep 5, 2000
27,399
3,942
126
Originally posted by: alchemize

They should be destroying the large banks and divvying up their assets to regional/local banks who actually know their customers and know the real value of those assets.
I would think that would be apart of the end game.
 

alchemize

Lifer
Mar 24, 2000
11,489
0
0
Originally posted by: JSt0rm01
Originally posted by: alchemize

They should be destroying the large banks and divvying up their assets to regional/local banks who actually know their customers and know the real value of those assets.
I would think that would be apart of the end game.
Well, that ain't how it's happening.
Link.

 

JSt0rm

Lifer
Sep 5, 2000
27,399
3,942
126
Originally posted by: alchemize
Well, that ain't how it's happening.
Link.
I'm saying after the ship has been fixed and cleaned up then they should sell parts for scrap. It's way to early (I think) to break these things up.
 

alchemize

Lifer
Mar 24, 2000
11,489
0
0
Originally posted by: JSt0rm01
Originally posted by: alchemize
Well, that ain't how it's happening.
Link.
I'm saying after the ship has been fixed and cleaned up then they should sell parts for scrap. It's way to early (I think) to break these things up.
You don't think your local banks could do a better job at not fucking things up even more than say...Citibank?

FDIC receivership. Even Krugman is espousing it and it makes me feel all dirty to agree with him, but he's right.
 

Chaotic42

Lifer
Jun 15, 2001
33,854
957
126
Originally posted by: microbial
Originally posted by: JSt0rm01
man you neocons that talk a big game could be eating your shoes if this thing works out. I wont begin to make predictions in this climate but a lot of you enjoy it enough and if you are wrong on this the republican party will be in for even more hurt. Seems like a risky position to take.
GOP just wants America to fail, as enunciated so eloquently by their grand leader Rush.

The Republican budget alternative can be more easily explained: picture two diagram circles connected.

First one has the text "RAT" written inside
The other has the text "FUCKING"

What's so hard to understand about that...
I thought he said he wanted Obama's policies to fail to be implemented? Those are different things.
 

yllus

Elite Member & Lifer
Aug 20, 2000
20,576
431
126
Originally posted by: alchemize
Originally posted by: JSt0rm01
Originally posted by: alchemize

They should be destroying the large banks and divvying up their assets to regional/local banks who actually know their customers and know the real value of those assets.
I would think that would be apart of the end game.
Well, that ain't how it's happening.
Link.
While I think that stabilization is the short term goal, I don't think any institution that we're now deeming "too big to fail" is going to escape being broken up and sold off in pieces when things have calmed down. I think they're holding off on even breathing about that happening so the markets don't implode in a permanent fashion.

I wonder what the plan is to keep the government driven bubble under control. I guess they're going to get to that when it happens.
 

Craig234

Lifer
May 1, 2006
38,548
345
126
Originally posted by: Chaotic42
Originally posted by: microbial
Originally posted by: JSt0rm01
man you neocons that talk a big game could be eating your shoes if this thing works out. I wont begin to make predictions in this climate but a lot of you enjoy it enough and if you are wrong on this the republican party will be in for even more hurt. Seems like a risky position to take.
GOP just wants America to fail, as enunciated so eloquently by their grand leader Rush.

The Republican budget alternative can be more easily explained: picture two diagram circles connected.

First one has the text "RAT" written inside
The other has the text "FUCKING"

What's so hard to understand about that...
I thought he said he wanted Obama's policies to fail to be implemented? Those are different things.
There are a handful of incidents I think the right had been unfairly attacked on in recent years, and this is one, in part.

Rush said that Obama wants to implement socialism (and he should be attacked for saying that), and tat he doesn't want Obama to be able to do that.

He wasn't saying he wants bad things for America, he was saying he thinks Obama's policies are bad for American, and so he doesn't want those policies for America.
 

microbial

Senior member
Oct 10, 2008
350
0
0
Originally posted by: Craig234
Originally posted by: Chaotic42
Originally posted by: microbial
Originally posted by: JSt0rm01
man you neocons that talk a big game could be eating your shoes if this thing works out. I wont begin to make predictions in this climate but a lot of you enjoy it enough and if you are wrong on this the republican party will be in for even more hurt. Seems like a risky position to take.
GOP just wants America to fail, as enunciated so eloquently by their grand leader Rush.

The Republican budget alternative can be more easily explained: picture two diagram circles connected.

First one has the text "RAT" written inside
The other has the text "FUCKING"

What's so hard to understand about that...
I thought he said he wanted Obama's policies to fail to be implemented? Those are different things.
There are a handful of incidents I think the right had been unfairly attacked on in recent years, and this is one, in part.

Rush said that Obama wants to implement socialism (and he should be attacked for saying that), and tat he doesn't want Obama to be able to do that.

He wasn't saying he wants bad things for America, he was saying he thinks Obama's policies are bad for American, and so he doesn't want those policies for America.
That is the Rush- revisionist version. The original statement he made was that he wanted Obama to fail vis-a-vis the economic stimulus plan. It was in this context, so in essence he was happy to see an Obama blow-up in exchange for a US economy blow-up.

Very typcal GOP thing to do. Reminded me immeadiately of the Bill Kristol and health care strategy. Next day Ruru backtracked like a hall-of-fame cornerback and spun some cockamamy socialist bullshit story. Obvious.

Take home message is that the GOP is unwilling to commit to a solution, or to any kind of sacrifice to our present economic problems. They are quite prepared and content to be obstructionists. Obvious.

Hence, a good and reasonable summary of the GOP alternative plan would be "a big fat F. America"
 

Craig234

Lifer
May 1, 2006
38,548
345
126
Originally posted by: microbial
That is the Rush- revisionist version. The original statement he made was that he wanted Obama to fail vis-a-vis the economic stimulus plan. It was in this context, so in essence he was happy to see an Obama blow-up in exchange for a US economy blow-up.

Very typcal GOP thing to do. Reminded me immeadiately of the Bill Kristol and health care strategy. Next day Ruru backtracked like a hall-of-fame cornerback and spun some cockamamy socialist bullshit story. Obvious.

Take home message is that the GOP is unwilling to commit to a solution, or to any kind of sacrifice to our present economic problems. They are quite prepared and content to be obstructionists. Obvious.

Hence, a good and reasonable summary of the GOP alternative plan would be "a big fat F. America"
I heard the clip that was as I decribed - but if you're informing me that I heard the second 'revisionist clip' about 'socialism' and not the original without it, I'll stand corrected.
 

BoberFett

Lifer
Oct 9, 1999
37,563
9
81
So the plan is basically to create another bubble.

Sounds like a great long term strategy.
 

Slew Foot

Lifer
Sep 22, 2005
12,381
94
86
Originally posted by: BoberFett
So the plan is basically to create another bubble.

Sounds like a great long term strategy.
But wait.. after BHO said he didnt want to grow the government and said he was for personal responsbility, he said he we couldnt have anymore bubble economies.
 

WHAMPOM

Diamond Member
Feb 28, 2006
7,628
181
106
Originally posted by: JSt0rm01
Originally posted by: CADsortaGUY
Whether it "works" or not(and they'll claim it "works" regardless of reality) doesn't matter, it's a principle thing.
Ohh so you would drive the country into a depression on principle. ok thats a good plan.

And are you guys not neocons anymore? I don't get the mailer so I didn't hear about the change
The term you search for is Pyrrhic-Cons.:beer:to them. May they drink their cup of ashes with joy.
 

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