As more details were unveiled yesterday about the Public-Private Partnership proposed by Secretary Timothy Geithner to deal with the "Toxic Assets" currently on the balance sheets of many of the major banks, the equity markets around the world experience what can only be described as euphoria. Equity markets in the United States experienced one of the biggest one-day rallies in history. Obviously, Wall Street likes the plan at first glance.
However, Paul Krugman, the liberal Noble Prize winner, wrote an editorial in The New York Times attacking the plan as "Cash for Trash." Subsequently, Newt Gingrich, the former Republican Speaker of the House, announced on Fox News that he agreed with Professor Krugman. When senior figures on both left and right agree, it may be wise to look past the euphoria.
Therefore, the government appears ready to create substantial incentives for these private investors to purchase at higher prices, possibly including non-recourse loans and government guarantees. This assumes that the banks are right, and these assets will eventually return to higher values.
However, suppose that the investors are right, and these assets are worth very little. We are merely paying private investors and banks with taxpayer funds to postpone the inevitable write-down of these assets. As we saw in Japan, postponing these write-downs does not change the situation. You cannot re-inflate the bubble!
This will simply result in huge tax bill for the American public sometime in the future. The cure may be truly worse than the disease.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com. He is the author of Follow the Fed® to Investment Success and an expert on FreePassers™. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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Reader Comments (Page 1 of 1)
3-24-2009 @ 3:38PM
veyron3k3 said...
The investors are right.