The latest bailout plan authored by Tim Geithner to fix the banks will fail, Nobel Prize winning economist Paul Krugman writes in The New York Times.
“[T]he Geithner scheme... isn’t really about letting markets work” he said.
“It’s just an indirect, disguised way to subsidize purchases of bad assets.”
Krugman said part of the blame also lies with President Barack Obama, who could stand to lose some of his political clout.
Krugman said the plan is not likely to work even if the troubled assets are undervalued.
“But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem,” he said.
“They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.”
Krugman said the plan really supports what he calls the “functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities.”
Geithner’s plan will result only in the banks receiving large gains even though they didn’t need a bailout.
“And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.”
However, other investors are behind the plan.
Laurence Fink, chief executive of BlackRock, said his firm will take part in the program, The New York Times reported.
“We will be raising money on behalf of our clients,” he said. “I don’t see how Congress can interfere in this.”
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