Leading economist Laurence J. Kotlikoff is deriding the Obama administration's plan to dispose of "toxic assets," claiming that the "scheme" will do nothing to help the U.S. economy but will help banks profit at taxpayer expense.
"It's one thing for the U.S. Treasury Department to overpay banks for their toxic assets on the prayer that bank shareholders will do something besides pocket it — something that will help the economy," Kotlikoff, a professor of economics at Boston University and a research associate of the National Bureau of Economic Research, writes in The Boston Globe.
"It's another thing to set up a complex leveraged auction scheme to surreptitiously make the transfer. And it's yet a third thing to set up a scheme that will lead the banks to overbid for their own toxics to garner even larger windfalls and end up with the toxics still in their hands."
Treasury Secretary Timothy Geithner and White House Economic Advisor Lawrence Summers are telling the market that they will match, dollar-for-dollar, bids to buy a toxic asset.
Without the subsidy, the troubled assets would likely be worth 20 percent of their face value. But with the Obama subsidies, Kotlikoff notes, purchasers will bid up the price of the bad bank assets.
They will then make a paper profit on the transaction. The banks also will set up other investment corporations to obtain more subsidies, he warns.
"It's possible that some fine print in the plan by Lawrence Summers, director of National Economic Council, and Treasury Secretary Timothy Geithner of the toxic-owning banks would preclude explicit hyper-self-dealing of the type just described. But when there is free money on the ground, people on Wall Street figure out ways to pick it up," said Kotlikoff.
"What we need is trust and transparency."
Kotlikoff argues that those banks that are insolvent based on market value of their assets should be taken over by the FDIC and reorganized.
"Over time we need to adopt limited purpose banking, which would make all banks, insurers and financial companies operate as pass-through mutual funds, which would never be allowed to gamble at the public's expense," says Kotlikoff.
Simply put, the Summers-Geithner plan needs to be scrapped. "Limited purpose banking is the right financial fix, and the sooner we implement it, the sooner we'll really recover," said Kotlikoff.
Other experts agree that what the government is doing is not good for the future of the U.S. economy, and it may be more of the same thing that got the economy into trouble in the first place.
"Without Fannie and Freddie’s status as government-sponsored enterprises, the Community Reinvestment Act, flawed financial-risk models, regulations that encouraged ‘shadow banking,’ innovations that allowed banks to over-leverage, and Fed policy that kept the real federal funds target rate too low for too long, the subprime/financial crisis could have been averted," writes James Dorn, in his editor's note, in the new issue of the libertarian Cato Journal.
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