Geithner's gambit a tough sell

Donald Lambro

3/25/2009 12:01:00 AM - Donald Lambro

WASHINGTON -- This week's $1 trillion question is whether Treasury Secretary Tim Geithner's public-private bank bailout plan will lure enough investors into buying up bad assets to end the nation's lending paralysis.

Wall Street cheered the plan -- as well as a welcome increase in home sales -- by sending the Dow Jones up nearly 500 points on Monday. But economists and cautious leaders in the financial community had their doubts.

The plan calls for using the fast-dwindling remainder of the $350 billion share of the bank-rescue money when economists say a great deal more will be needed to finance the government's share of the buyout deal.

Financial experts told me Monday that private-investment funds were going to be hesitant about buying up assets "when no one knows how much they are really worth."

Former Securities and Exchange Commission chairman Arthur Levitt told The Washington Times on Monday that investors will be "very, very cautious" about participating in Geithner's plan.

New York Times columnist Paul Krugman, the scourge of American capitalism, said Geithner had talked President Obama into "recycling" the Bush administration's "cash for trash" plan that then-Treasury Secretary Henry Paulson tried last year -- only this time with a few more bells and whistles.

But Geithner's scheme is a one-way bet that's doomed to fail, Krugman argued. If the government's incentives to buy the bad assets drive up their value, investors and banks profit; if they don't, taxpayers will be left holding the bag. Krugman, a bleeding-heart socialist, thinks the feds should take control of the insolvent banks, as Sweden did in the 1990s.

University of Maryland economist Peter Morici levels similar complaints. The plan Geithner "is cooking up could unnecessarily stick the taxpayers with big losses on those toxic assets and give the banks big, unearned profits. It could save many bank executives' careers, while running up the federal deficit even further and undermining international confidence in the dollar," Morici said.

Other economists maintain there are not enough funds left in TARP's resources (even with government loans and guarantees) to bankroll a plan aimed at potentially trillions of dollars in bad assets. Treasury will need at least another $400 billion to make a noticeable dent in the toxic assets clogging up the financial industry's books, said Wall Street economist Mark Zandi at Moody's financial-rating company.

"The plan could fail to remove enough toxic assets from the balance sheets of the banks to unlock private credit markets," Morici said. "Ultimately, the resulting federal deficits and domestic economic paralysis could make financing federal budget deficits, through domestic and foreign borrowing, extraordinarily difficult."

The Obama administration's latest attempt to bring some stability to the financial system comes at a time when it is getting poor to failing grades for its handling of the economy thus far.

Economists and private-investment-fund analysts told me that they think Fed Chairman Ben Bernanke has been doing the heavy lifting in policy initiatives up to this point.

A survey I conducted last week of several government and economic analysts turned up surprisingly blunt assessments of President Obama's performance -- even from some very liberal quarters. "His success thus far is the stimulus bill, which is a necessary, though not sufficient, condition for keeping the recession from leading to deflation and global depression," said Thomas Mann, senior fellow in governance studies at the Brookings Institution.

"The financial-rescue efforts have been shaky. What little public support for the effort that existed under Bush has diminished further under Obama. He has been behind the curve of populist anger, which leads to the kind of harmful legislation that the house passed Thursday" to slap a draconian 90 percent tax on AIG executive bonuses, Mann told me.

David Wyss, chief economist at Standard & Poor's, gives Obama mixed grades, too. "He's done a decent job of communications, though not as good as he could. A lot of his ideas are good, but there has been a lack of focus.

"He's got to make clear that priority No. 1 is getting the economy back on track. A lot this stuff -- healthcare and energy, for instance -- has got to be put on the back burner," Wyss said.

With half a dozen or more key assistant-secretary posts at Treasury still vacant, Wyss credits the Federal Reserve and Bernanke for doing the most to keep the economy's vital signs operational. Indeed, the Fed and FDIC are the major partners in Geithner's latest financial gambit.

"I think Geithner is relying on his former colleagues at the Fed for policy support instead of the people who are working for him at Treasury. The Fed seems to be the only department that's operating right now," he told me.

That poses implementation problems for Geithner's latest scheme to put Treasury back in charge of reviving bank lending, the key to leading the U.S. economy out of the recession.

Overriding all of this may be the market itself. With 30-year mortgages sharply down to 4.7 percent on average and likely to fall further, and home prices continuing their decline, never underestimate the power of homebuyers to respond to the chance of a lifetime to purchase a piece of the American dream.

Perhaps this, more than any government bailout, will get this economy growing again.