The Geithner plan: let’s create the biggest hedge fund in the world
Posted on 23. Mrt, 2009 by Geert in Actualiteit, het nieuwe kapitalisme
I will spare you all the details, but the Geithner plan is basically the creation of a government-run hedge fund, in which all possible clients are invited to participate. The difference with a hedge fund is the remuneration of the managers of the fund (which will not be the typical 2/20 rule), their offices (which will be low-profile Washington government buildings) and their size (the biggest in the world, equal to all the other hedge funds put together).
It will relief bank shareholders to a certain degree, and fuel hope for a recovery. The Geithner plan is a bold move to stop the financial meltdown. It is based on some assumptions:
* toxic assets are basically undervalued
* unlocking the debt market will give room for new credit creation and hence economic growth
We could add that the Geithner plan prevents from a full nationalisation, and tries a sort of public-private partnership to finance the bail-out.
I have my doubts that it will alter the US economic outcome fundamentally. Mainly because I differ on some assumptions:
* high (consumer) debt levels are the problem
* credit driven growth is not a sustainable model
* the government is now well advanced in creating its own debt problem
The Geithner plan is not bad for the short term. But in the long run, this is a shot in the dark, a big experiment to solve the crisis. The US government debt buy-back program last week was also an “unconventional measure”. This one adds another measure to the list. The monetary and economic policy in the US since 1996 has been characterised by one big experiment. Starting with Greenspan, and now extending over Bernanke and Geithner. I have the awkward feeling that it is the kind of strategy sometimes seen in Monte Carlo: “when in trouble double”.
Frederic
23. Mrt, 2009
When Obama was presenting the plan, he didn’t look very healthy, he wasn’t very enthousiastic ether.
I think it could be a long shot in the dark, but the shot seems to be taken, I can only hope we all make the best from it and the world (or the economists) don’t start cracking of the plan but try to look at the positive side of it.
I have mentioned it in the beginning of this Blog, negative sentiment doesn’t get you anywhere in anything in life. We aren’t in power to alter the plan, to change it or to make another one. We are in Power to look at the plan, where the possible opportunitys are and explore those so the world economy can get back up it’s feet.
PS : ok, the plan is presented, but as always in plans like this, there is a hidden agenda. My guess, avoid deflation, create (high) inflation and brind hope .
koen2
23. Mrt, 2009
Krugman doesn’t like it either:
http://krugman.blogs.nytimes.com/2009/03/21/more-on-the-bank-plan/
The assumption, underlying this plan is that this crisis can be ‘fixed’ in a short time. Just make sure that the banks can lend again and that the credit boom can continue.
It’s like giving more alchohol to an alcoholist: high debtlevels (results of the credit boom) are, indeed, the real problem:
http://s.wsj.net/public/resources/images/OB-DC115_BATOPC_NS_20090206234459.gif
See also this analysis by Nomura economist Richard Koo:
http://media.csis.org/csistv/?081029_koo
Frank
23. Mrt, 2009
@Frederic
Excuse me??? Can we please, please, please wake up?
1. Obama failed the minute he chose Geithner and Summers as member of his team. He failed big time because Geithner lies at the foundation of the problem, not the solution. Geithner was a key figure in dismantling the Glass-Steagall act which layed the groundwork for this crisis. Obama should have know better. He should also stop lying to the people. Hope and inspiring words are not going to pay back debt. A good dose of reality is the first step towards a possible solution.
2. Geithner’s plan is not going to work. It can’t work. His plan is to unlock the debt market by … more debt. Read it again: unlock the debt market by more debt. Solve a debt problem with more debt seems impossible to me. Can someone please tell me what I’m missing here?
3. How is taking debt from the balance sheets of the banks and putting it on the balance sheet of the government (read taxpayer) going to solve anything?
4. I sure as hell hope that our financial future does not rely on hope. Hope is not going to get us out of this mess. Our financial future is relying on hard work, living within our means and savings. Until someone at Teasury realizes that this problem is going to get bigger and bigger.
5. Negative sentiment is not going to get us anywhere. Positive sentiment is not going to get us anywhere either. Only hard work, living within our means and saving can get us somewhere.
6. The world economy can not possibly get back on it’s feet because the world economy was not real. Read it again: not real! It was based on a 30 year credit boom that went ballistic in it’s last decade. It was a bubble. When the biggest credit boom goes bust you get the biggest bust. The problem is debt. The solution can not possibly be more debt. Avoiding deflation is very very hard to do because bussiness and consumer sentiment towards lending and debt turned 180 degrees.
7. If or when central banks succeed in creating (high) inflation it sure as hell will not bring hope. It will destroy the currencies. If destroying our currencies is your idea of hope than I hold my breath. Then we are on our way to Zimbabwe. Ask how much hope they have over there, it might surprise you.
8. Can someone please, please, please bring back Paul Volcker and Ron Paul back to the FED. Please … We are in very serious trouble and it’s only getting worse.
Theo
24. Mrt, 2009
This was always in the plan right from the start.
It was only unsellable to the “politically correct” crowd… screaming Communism!
I wonder if George Soros would like you calling this plan a “hedge fund”…
It’s all about jump-starting the credit machine… by putting away the end-products of the debit boom.
I don’t believe that the toxic assets are undervalued. There are no outside bidders!
The US has no choice but to do this in order to restart the Banking system… hopefully with a different business model! Again, no bidders here, so no choice but to try do it on their own and hope for the best.
I agree, it’s not a plan aimed at sustainable growth. They wouldn’t even know what that is.
Bart
24. Mrt, 2009
@Koen2, long and nice analysis by Richard Koo, thanks!
Looks like Japan gets the “last laugh” so to speak.
This ppp may not be a full blown nationalisation on the outside, but that’s just cosmetics. The public part takes a huge risk in this “Geithner recycles Paulson plan”. And that’s on top of the money already made available. It would only be fair (apart from the desirability debate) the “public” gets “all”, after all taxpayers (will) pay for everything. It’s just more socialisation of losses… but hey, it’s pragmatic in the usual way of thinking (not that I like it)
These toxic assets won’t get healthy by paying too much for them at an auction and letting them mature, to what and till when?? They’ve muted into liabilities and should be named as such.
“when in trouble double” and brace for double trouble
Theo
24. Mrt, 2009
It is nationalisation! That’s why the pill was bitter to swallow ideologically.
The banks ran away with 50% of the profits.
The taxpayer gets stuck with 95% of the losses.
Again… no choice.
economy now estimated to recover in 1012… or so.
which is only just some more hot air.
how can this ever get resolved internally?
China demanding the IMF introduce its emergency reserve currency.
blue-coat
24. Mrt, 2009
“unlock the debt market by more debt.”
“The solution can not possibly be more debt”
“Negative sentiment is not going to get us anywhere. Positive sentiment is not going to get us anywhere either.”
“Solve a debt problem with more debt seems impossible to me”
@Frank
Above statements are :
1. clear
2. to the point
3. very convincing that this plan is nothing more then crap
4. … and econo-shocking for people that still have faith in government-intervention in this financial crisis.
The more I read this site, the more convinced I am that Geert should add another econochock in his book :
Econoshock number 7 : The effects of National banks on future generations.
And according to me , the effects of econoshock 1 to 6 will be nothing compared to econshock 7 !
koen2
24. Mrt, 2009
excellent summary of what’s wrong with the plan:
http://www.businessinsider.com/henry-blodget-geithners-three-big-misconceptions-2009-3
Frederic
24. Mrt, 2009
@blue coat, if you have read the book, you should have noticed that Geert did mention the central bank politics.
Just a small remark to you (and Frank) if you realy believe that a financial crisis will have bigger effects then for example the energy and green shock , then I do think there is something fundamentally wrong with your way of thinking.
The world won’t stop spinning because there is more or less money, if for example the green shock turns out to be what the most negative scenario’s are predicting, money will become irelevant for 90% of the worldpopulation.
If we keep focusing on green paper or yellow metal as the only true value of life, we won’t fix the energy crisis . I think you realy need to think about some true values in life. The way you and Frank sometimes talk about money is to black and white, money is something we people have invented themselves, before the human walked on this planet there wasn’t money, trees are growing because they have water and carbon in the air, not because they get payed, I love my family and friends due to several reasons, not because I get money from them (I don’t get money from them btw) , if your house risks flooding you won’t stop the water with money, but with sand bags filled by you and your neighbours, etc… .
If I could give you an advice, go for some traveling on your own to some other regions then most of us go, I have traveled to some non touristic regions in the world on my own and have learned some true meanings and values wich are in my opinion are more important then money.
For a sidenote, this is also why I think the comparisation between Zimbabwe and the US is totaly wrong, even if the US get hyperinflation and they print money like hell, the US is such a big country with so much commodities (furtile grounds, iron, gold, Oil, gas, ….) and knowledge they can have an internal economy wich can spool us with cheap products. Country’s like zimbabwe can’t even support themselves, they have no true value.
Theo
24. Mrt, 2009
People in Afghanistan don’t need money either. They collect opium and trade it for goods.
I’m sure it can qualify as bio production and trade.
Green sounds as a big business… aimed for export to developing countries only.
developed countries are currently fighting over contracts for building nuclear power stations. They are also fighting over the Arctic Circle… not for conservation reasons but for among others the not so green resources they all want to extract.
Further more even the US doesn’t believe in the power of green… or they won’t be sending a satellite to look for an other earth in a different galaxy.
In Europe, the electric grid is kept to handle only 4% of energy produced from any green sources. That’s why the french company has monopoly on Belgium, France and UK… cause they are planning to build nuclear power stations. The green stuff is for Eastern European countries in case they start growing faster than us here.
Noticed the high number of M&A and investment activity in certain drug companies lately… Yep Frederic, cancer and other long term illnesses will be a very big business in the future. I doubt they’ve based their strategies on the success of the power of green.
Yep Frederic, that’s where all the values are going long term.
In the short term, green business is all about the big business of subsidies to keep us busy trying to save the planet.
I travel a lot and have contacts in even more places around the globe.
I also know people who actually do studies in all the green technologies and their actual cost/benefit.
Last week I was in Mauritius… no not for the sun and the sand. After their monopoly of selling sugar to Europe at exorbitant prices was broken off by the WTO, they have now embarked on “Maurice – ile durable” project. Needless to say most of the projects selected are JVs with European and US companies. The technology involved is not really green, but does pass the test for EU subsidies. Even the French adviser to the PM is against a planned incinerator… they politely told him to shut up.
Biogas and methanol from sugar cane… it has been proven that the processes to get there are even more harmful to the environment than to run your car on oil.
You can actually make methanol from sea water but that’s not subsidized by the EU.
In Polynesia they make aircon from the sea water, but that’s not being subsidized.
The Business of Green is about trade and big mountains of Green Money… not about values, your children or saving the planet.
The lives of your 10 next generations have been mortgaged by what has happened. That was as result of competition and fight for power.
We talk about money, because without money everything stops. Maybe you haven’t understood it yet, but the current economic crisis is as result of the lack of money flowing through the financial system.
Frederic
25. Mrt, 2009
@Theo ,
I think you misunderstood a part.
In several replies from me I have stated exactly the same thing as you, there is lack of money.
Why do you think I keep arguing we can’t go back to the gold standard ?? The fiat money system can work perfectly, only in a globalised world we need a more unified system, more control of the IMF.
These are things I have been saying since the start of the Blog here.
In short term those subsidies are making green power money efficient but actually on the long term they are the best investment, not only will those subsidies bring some solar panels, wind turbines , … but those subsidies are also a big sponsors for technologie. It’s something wich can save the western economy.
Even now as we are speaking German and some northern Euro country’s are developing groundbreaking technologie for solar energy, it’s only a sad thing we don’t participate in Belgium, because Belgium has tons of highly qualified people.
We do have a growing gearcase manufacturer for windmills, a good thing !!
The point I wanted to make, in some replys from frank and blue coat, it’s over the top about this crisis, I am convinced if you are now already thinking this is the biggest crisis of the econoshocks you are wrong, the energy and green shock will be much harder. This is also why I have stated to you that we don’t need to grow to the chineese model but the other way around, it’s hard on the short term but on the long term we will win. China will have to deal with there enviroment at some point, if that point will come at the same point as the true energy shock, China will be trown back extremley hard, way harder then the US is trown back now with there financial problems.
I am also a believer that money is actually something people have to get easely , only if they work for it offcourse. People have the potential to to much bigger things then we are doing nog but we are drawn back by the lack money, it wouyld be wrong if money (something we have invented ourselves) would become the thing wich brings a hold to the technological evolution from the human being.
This does have to come wich regulations from the gouvernment so we don’t spent all our potential in developing race cars, privat jets, … but in more durable products, in durable entertainment, in health care(the upcomming market, who invests now will be market leader later) , ICT, …. .
At some point, Geert posted something about Schumpeter, an economist who talked about “creative destruction” . His ideas have many comparisations to my ideas, people need easy acces to money so we can use the full potential of the human being, it is the only option to save ourselves and the planet.
PS : believe it or not, many of the things I have said in the beginning of this Blog are happening at this moment.
More power from the IMF, a more international reserve currency is on the table, policies about the retail of money are going to be sharpent.
PS2 : I do understand perfectly, all this, we humans, are much depending on money, but I am convinced we will get out of this crisis in the next couple of years in a better (financial) world. As I am not convinced we will get out of the green and energy shock so easely.
PS3 : I also think, at this point gouvernments don’t seem to take the correct actions to the financial system, but I think they are trying to take the financial system back on track again as it was, and once this is the case they will bring the real big changes to the financial system.
In our current situation you can’t change the fundamentals of the system because then the building would collapse for shure, first you need to support the building hten you can start working on the fundaments.
Frank
25. Mrt, 2009
@Theo
I totally agree. The green revolution is much about grabbing as much as possible (subsidies) from what governments print (money). Nobody cares whether it’s truly sustainable. They only care about return on investment which depends on subsidies. I’m interested to see what’s going to happen to the green tech if or when governments destroy our currencies (and subsidies) compared to the value of biomass on which these technologies are based on. I’m interested to see what happens to biomass energy when we finally realize that we are short of food. Prepare for surprises …
@Frederic
“The world won’t stop spinning because there is more or less money, if for example the green shock turns out to be what the most negative scenario’s are predicting, money will become irelevant for 90% of the worldpopulation.
“
The world won’t stop spinning when there is a money problem. It won’t stop spinning if there is an oil problem or climate problem or demografic problem or even a war problem. Values like friendship and love are extremely important in life, but they don’t pay your food or energy bill. If money is not important to this world then why are central banks printing so much of it? Or why are you going to work to earn it? Or why are we even arguing about it? The fact of the matter is that money (in it’s many forms) has been extremely important through history in almost every society. We need a money system to function, and it needs to be a sound money system.
Of course this crisis is going to have big effects on the other econoshocks. Worse, some of the other shocks can become irrelevant because of the crisis. If this crisis goes where I think it will go than we will solve much of our excessive carbon emmision problem. Lot’s of the environmental problems we are facing now are there because of the credit boom that preceded them. The credit bust is the best thing that could happen to the environment. Let’s hope people can’t pay to travel 5000 km just for the holidays, or drive an SUV to the grocery store. It will benefit our planet.
Frederic
25. Mrt, 2009
Sorry Frank, I don’t know the exact term in English but in Dutch “uit de context trekken” , you just won’t see whe whole picture.
I do understand the relevance of money and it’s effect on the other econoshocks (do you actually read or even try to understand what it put down?) .
See my what I said on Schumpeter in combination with strict retail etc… .
And I have also stated that money whould be easely available, you state money should be the most valuable thing on the planet, in that case money will become so valuable all the rest doens’t mather anymore, goldfever is was a known term in the past.
blue-coat
25. Mrt, 2009
Indeed, goldfever made the Spanish Crown and its spanisch goverment friends in the 1600s very rich at first but after inlation did its job, it completely ruined the economic situation of the Spanish population. It was so disasterous that Spain and its colonies completely missed the Industrial Revolution train and even till the last century (note that this is more then 10 generations) they had the status of development country.
Goldfever, just as moneyfever is a bad thing for the ordinary people, because decrease the value of the trading currency (gold/money). The outrage is that easily avalaible money is presented as stg that is good for the people.
There is also stg else that both goldfever and moneyfever have in common :
Both were/are sustained by a form of goverment, not by a free market.
blue-coat
25. Mrt, 2009
@Frederic,
There is a difference between :
“money should be the most valuable thing on the planet”
and stating that
“money should keep its value everywhere on the planet.”
Understanding this difference makes discussions of the importance of money useless and gives more value to everybodies life, Frederic,
including :
-yours ;
-the Western people of the 10 next generations ;
-the African people of the 10 next generations. How do you think that Africa over the next 10 generations will evolve if the western middle-class will be suffering from debt ?
Note that it does not matter whether you have friends all over the world or not, or you have enough money to see a lot of misery in the world to fully understand this difference. Understanding this difference is affordable for everyone.
Frederic
25. Mrt, 2009
Blue coat, I do understand that perfectly,
i stick to my opinion, this crisis isn’t the biggest one in our lifetime, who is panicing now won’t be able to hold on in the two biggest econoshocks in the upcomming decenia.
I was in this topic refering to your statement this will be the biggest econoshock, but in true values it will be peanuts.
In all my reply’s you will find I think we need a good financial system but with the freedom (internationaly controled for more balance)) to create money to the demand so the human potential can be fully unlocked and used to take on the future.
But “wat baten kaars en bril als de uil niet ziene wil”
Theo
25. Mrt, 2009
Dear Frederic,
some people in the north of Europe as you put it, might have some very good ideas, but fact is the largest producer of solar modules in the world is a Chinese company.
Do you know how western companies recycle solar cells? They dump them in China as the cost is 1/3.
So dear Frederic, while Chinese companies are working on 3rd generation solar modules, you are among those accusing them of dirtying the environment because they are recycling the garbage you send them.
Then I have to read your ramblings about “if China did what we do”… Well dear Frederic, they don’t do what we do!
What we do is recycle our garbage… but we don’t ask what happens to it after.
We live in some sort of cocoon where our government has tricked us to think that if our garbage looks clean (after we recycle it at home) that must mean that garbage is clean tout court.
And when it’s shipped off to China, India and Africa… well we have Frederic here to tell us that THEY are the evildoers, responsible for polluting the Environment.
About the IMF… your analysis is so far of the mark, I don’t even feel like making a reply.
When did the credit crunch become apparent? In 2007 after the US – China negotiations when China categorically refused to open its doors to US/EU toxic assets.
The financial system was next as China refused to throw its money into a blackhole like all the other central banks were busy doing.
It is China now asking for change in the financial system… not just quick fix.
I have never advocated, as you suggest, that we should become like the Chinese… whatever it is you may mean by that. Believe me, they have no intentions of becoming like you.
But a bit of objectivity hasn’t hurt any body.
I have no issue debating with you, but as I previously said, stick to what you actually know.
Frederic
26. Mrt, 2009
Dear Theo,
About the recycling/envrioment system, I do believe you are hanging up some wrong image here. You are also mixing some things I have said.
I am fore more support for EU research into solar panels, wind turbines, etc… I have never mentioned this section acoording to the Chineese way.
If however you think China is respecting the enviroment, and we aren’t. Sorry, I think you don’t have a clear vision on some isues. In CHina whole rivers are getting lifeless, whole area’s have no bees anymore , the chemical polution of grounds and water in CHina is huge, air polution is dramatic, etc… . All things we are taking care off.
Yes indeed, we have moved a part of our polution to the east by producing our goods over there. This is the unfair competition of China. If your solution is to get rid of our enviromental goods to get competitive , sorry, wrong.
“The financial system was next as China refused to throw its money into a blackhole like all the other central banks were busy doing.
It is China now asking for change in the financial system… not just quick fix.”
Where did I mention China was looking for a quick fix ? read my remarks in the topic about “china asking …” .
And it it was and is China who is still buying massive amounts of $ obligations.
about your last remark,
“I have no issue debating with you, but as I previously said, stick to what you actually know”
Reading your statements on the rendability of green power and how the East is working. It seems you are picking up things out of there context and refuses to see the whole picture. I also find the remark unappropriate.