Brad DeLong and the Geithner Kool-Aid

He writes,

The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit.

Brad is not just swallowing the Kool-Aid.  He's guzzling.

He thinks of the "toxic assets" as if they were real, tangible investments, like fruit trees that eventually are likely to bear fruit.  However, others of us think of them as gambling debts.  Financial institutions wrote put options and collected nice fees, hoping that the options would never be in the money.  But a lot of them are at least close to being in the money, and the sellers want to be relieved of the obligation to pay off the debts.

The gambling-debts perspective makes one a bit less enthusiastic about committing taxpayer money to this scheme.

Presented by

Arnold Kling

Arnold Kling earned his Ph.D in economics at MIT. He was an economist on the staff of the Federal Reserve Board. From 1986-1994 he worked at Freddie Mac. He started Homefair.com in 1994 and sold it in 1999. His fourth book, From Poverty to Prosperity, co-authored with Nick Schulz, is due out in April of 2009. He blogs regularly at Econlog.

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