What is the Geithner Plan?

The Geithner Plan FAQ

by J. Bradford DeLong, Department of Economics, U.C. Berkeley

Q: What is the Geithner Plan?

A: 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.

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?

A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition....

The Geithner Plan FAQ

What Should We Do About These F#@$**$ Banks?

Episode 375of This American Life: Bad Bank

If you have not listened to them already, the series of episodes of This American Life on the financial crisis are essential listening. This is the third in the series and presents a thorough examination of what the options for dealing with the banking crisis. It covers the options from doing nothing, to nationalization, to the hybrid approach being pursued by the current administration.

What Are "Green Jobs"?

From Astrongmiddleclass.gov

What is Nationalization of Banks?

And should this be the strategy for the U.S.?

The former research director of the IMF analyses the bank bailout plan and its alternatives:

Simon Johnson on Bank Bailout Plan

What Are Earmarks?

From the article Saying That Cutting Earmarks Will Reduce Spending Is A Lie

An earmark simply is a congressional decision to allocate part of appropriation for a particular purpose. Eliminating the allocation doesn't reduce the appropriation, it simply leaves the allocation decision to a federal department or agency rather than to Congress.

What Happens When You Miscalculate Risk on Mortgage Investments?

This is from an article in Wired that explains how a mathematical formula that very few people understood was misused to improperly calculate the risk of mortgage investments.

The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.

But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are.
Investors like risk, as long as they can price it. What they hate is uncertainty—not knowing how big the risk is. As a result, bond investors and mortgage lenders desperately want to be able to measure, model, and price correlation. Before quantitative models came along, the only time investors were comfortable putting their money in mortgage pools was when there was no risk whatsoever—in other words, when the bonds were guaranteed implicitly by the federal government through Fannie Mae or Freddie Mac.

Yet during the '90s, as global markets expanded, there were trillions of new dollars waiting to be put to use lending to borrowers around the world—not just mortgage seekers but also corporations and car buyers and anybody running a balance on their credit card—if only investors could put a number on the correlations between them. The problem is excruciatingly hard, especially when you're talking about thousands of moving parts. Whoever solved it would earn the eternal gratitude of Wall Street and quite possibly the attention of the Nobel committee as well.

Recipe for Disaster: The Formula That Killed Wall Street

What is this Big Scary Graph From Obama's Budget Proposal?

This graph is truly frightening. Here's how the administration explains it in the budget proposal:

Fiscal Irresponsibility

Another manifestation of irresponsibility is the large budget deficits we are inheriting. These deficits, over time, will harm economic growth and impose burdens on our children and grandchildren. For the past eight years, in a time of economic growth, the Government spent recklessly on tax cuts for the few and hand-outs for the well-off and well-connected, mismanaged billions of dollars in taxpayer money, and failed to honor the responsibilities we have to future generations

Massive new programs have routinely been omitted from the Budget to mask their true cost, while a new entitlement program and massive tax cuts were proposed and signed into law without anyattempt to pay for them. Between 2000 and 2008,real Government outlays increased at a 3.6 percent annual average rate, three times the 1.2 percent annual average rate between 1992 and 2000. This has helped turn a surplus of $236 billion at the end of the Clinton Administration, that was projected to grow still larger over time, into a deficit of more than $1 trillion in 2009. (see Figure 12, Surpluses Have Turned to Deficits). Furthermore, the amount of debt held by the public has nearly doubled to $6.4 trillion from 2001 to 2008 We are now living with the fallout of this deep fiscal irresponsibility.

Unfortunately, we are also inheriting the worst economic crisis since the Great Depression -- which will force us to increase deficit spending temporarily as we try to jumpstart economic growth. This is an extraordinary response to an extraordinary crisis, and as we come out of this recession, we must return to the path of fiscal responsibility. It will mean tough choices choices that are tougher because of the legacy of fiscal irresponsibility left to us.