Jenkins on Geithner's Gamble

"By the New York Post's informal survey, more than 90% of several dozen living Nobel economics laureates don't like Tim Geithner's toxic assets plan, albeit for a variety of reasons. But the most cogent was offered by Columbia's Joe Stiglitz, who essentially asked: What plan?

"The Geithner formula would leave the FDIC with the losses if the economy continues to deteriorate and loan assets go bad. If the economy improves, private investors (hedge funds) would get the profits. How is that different from now? With the assets still on the banks' books, the FDIC bears the risk of a continued economic collapse. If the economy recovers, private investors (bank shareholders) get the profits.

"A year ago you could believe a quick fix for the banks might mean a soft landing for the economy. We're past that now. With industrial production plummeting around the world, and with trade flows dropping at the sharpest rates since the 1930s, the illness has metastasized far beyond the US banks. Meanwhile, fear of an uncontrolled US bank failure is off the table because, since last fall, all restraints have been broken through as the Fed's printing press has been hooked up as the system's respirator.

"What all this may sadly mean is that the Geithner plan amounts to little more than a shell game with respect to the real issue -- whether the economy will continue to fall apart. If it does, there will be massive loan losses ahead and the FDIC may face an impossible task trying to make good on all its commitments out of real (non inflationary) resources.

"Maybe that explains the Obama budget's sunny outlook predicting recovery later this year -- which allows the administration to duck any question of massive contingency funding for the FDIC to cover the failure of Citigroup and friends."

-- Holman W. Jenkins Jr., Wall Street Journal