Latest Plan to Resuscitate Economy Making for Strange Bedfellows
The Obama Administration has announced a plan to join forces with private equity firms and hedge funds to forge a public/private partnership to tackle the challenge of reversing the Housing and Credit Crisis. This is coming after weeks of assailing the rich with income and capital gains taxes, calling for a “redistribution of wealth,” and pushing for “cram down” on home mortgages.
Can they even be serious with this plan?
As Paul Krugman has stated in the New York Times, “Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators. Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again. Why do officials keep offering plans that nobody else finds credible?”
Could it be that they don’t have any other ideas?
This most recent trial balloon is for a 9:1 leveraging with private capital to purchase recently issued highly rated securities to fund consumer lending, allowing the private capital to make the profits off of such a deal, with minimal risk of loss. This program, named Term Asset-Backed Securities Loan Facility, or TALF, will be rolled out in two separate $1 Trillion moves, one of which may come within the next two weeks as Treasury Secretary Geithner stated in congressional testimony on Wednesday.
Here is an outline of how TALF would work, according to The Washington Post, “A hedge fund uses $1 million of its own money and gets a $9 million loan from the Fed, payable after three years, to buy a $10 million asset-backed security, which finances consumer loans. Hoping that the market for these assets recovers, the hedge fund would hold the asset for three years. If the security rises in value to $11 million, the investor would keep the profit, essentially doubling the initial investment. The government, meanwhile, would consider the deal a success because consumer lending was spurred. If the value fell below $9 million, the hedge fund would lose its down payment but nothing more. The Treasury, using bailout funds approved by Congress, would cover the next set of losses, with the Fed ultimately on the hook for anything more.”
Meanwhile, the stock market continues to struggle, as it has become more and more obvious that President Obama intends to do just what he promised in redefining the way that The Government works in the life of the individual and the forces of economy, including a rapid shrinking of Defense budgets, higher taxes, increased entitlements, decreased itemized tax deductions for charitable contribution, while also ignoring the effects that such moves may actually have on future growth of the economy. The Dow Jones Industrial Average has dropped more than 20% since Inauguration Day, the biggest drop in at least 90 years and according to Bloomberg, “Only twice has the benchmark gauge slipped in the 12 months after the election of a Democratic president since 1900, after Woodrow Wilson’s victory in 1912 and Jimmy Carter’s in 1976.”
Even more subtle, but of great concern, is that the amount of American’s who pay no net taxes on income will rise from 38% to 50%, meaning that a voting majority of the population may have no staked interest in the continued expansion of Federal Government.
And not only is Secretary Geithner facing one of the worst economic crisis of all time, but he is doing so without a fully staffed Treasury Department. The staffing problem is so dire that Treasury did not even have anyone available to testify in front of congress regarding the recent AIG bailout. Neel Kashkari, a Bush holdover who took a significant amount of heat in December regarding the management of TARP in congressional testimony, is still in charge of TARP, but cannot relate policy initiatives to affected parties or negotiate with banks because he is on his way out and is not privy to future plans.
When it comes to finger pointing as to who to blame for the financial crisis, the Essential Information and Consumer Education Foundation may have identified the true players, according to a 231-page report, the financial sector invested more than $5 billion in political influence purchasing in Washington over the past decade, with as many as 3,000 lobbyists winning deregulation and other policy decisions that led directly to the current situation.
The Washington Post, U.S. to Invite The Wealthy To Invest in The Bailout, by David Cho
The New York Times, The Big Dither, by Paul Krugman
The Wall Street Journal, Obama’s Radicalism Is Killing the Dow, by Michael J. Boskin
Bloomberg.com, ‘Obama Bear Market’ Punishes Investors as Dow Slumps, by Eric Martin
The Washington Post, Understaffed Geithner can’t keep up, critics say, by Daniel Wagner
Essential Information and Consumer Education Foundation, Sold Out How Wall Street and Washington Betrayed America, March 4, 2009
(* This article was originally published March 12, 2009 on the Yahoo Contributor Network)