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.

Where is the money from the ARRA going?

Recovery.gov has begun posting data on where and how much

From the website:

Our Mission

• Education: Explain the American Recovery and Reinvestment Act;


• Transparency: Show how, when, and where the money is spent;


• Accountability: Provide data that will allow citizens to evaluate the Act’s progress and provide feedback.

The American Recovery and Reinvestment Act is an unprecedented effort to jumpstart our economy, create or save millions of jobs, and put a down payment on addressing long-neglected challenges so our country can thrive in the 21st century. The Recovery and Reinvestment Act is an extraordinary response to a crisis unlike any since the Great Depression. With much at stake, the Act provides for unprecedented levels of transparency and accountability so that you will be able to know how, when, and where your tax dollars are being spent. Spearheaded by a new Recovery Board, this Act contains built-in measures to root out waste, inefficiency, and unnecessary spending. This website, Recovery.gov, will be the main vehicle to provide each and every citizen with the ability to monitor the progress of the recovery.

As the centerpiece of the President’s commitment to transparency and accountability, Recovery.gov will feature information on how the Act is working, tools to help you hold the government accountable, and up-to-date data on the expenditure of funds.

The site will include information about Federal grant awards and contracts as well as formula grant allocations. Federal agencies will provide data on how they are using the money, and eventually, prime recipients of Federal funding will provide information on how they are using their Federal funds. On our end, we will use interactive graphics to illustrate where the money is going, as well as estimates of how many jobs are being created, and where they are located. And there will be search capability to make it easier for you to track the funds.

The first incarnation of Recovery.gov features projections for how, when, and where the funds will be spent -- which states and sectors of the economy are due to receive what proportion of the funds. As money starts to flow, far more data will become available.

What is the American Recovery and Reinvestment Act?

American Recovery and Reinvestment Act of 2009

Making supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, and State and local fiscal stabilization, for the fiscal year ending September 30, 2009, and for other purposes.

American Recovery and Reinvestment Act of 2009 - Calls for the enactment of legislation to create jobs, restore economic growth, and strengthen America's middle class through measures that:
(1) modernize the nation's infrastructure;
(2) enhance America's energy independence;
(3) expand educational opportunities;
(4) preserve and improve affordable health care;
(5) provide tax relief; and
(6) protect those in greatest need.

Read it here: American Recovery and Reinvestment Act of 2009

What's in Obama's Budget?

Read it and find out.

Obama's FY2010 Budget

What Made the Crisis Spread So Deep? And What Should We Do About It?

Another Frightening Show About the Economy

Alex Blumberg and NPR's Adam Davidson—the two guys who reported our Giant Pool of Money episode—are back, in collaboration with the Planet Money podcast. They'll explain what happened this week, including what regulators could've done to prevent this financial crisis from happening in the first place.

If you don't have time to listen to this whole episode, listen to act 2:

Act Two. Out of the Hedges and Into the Woods.

One more confusing financial product that’s bringing down the global economy. And one of way to think about this product is this: If bad mortgages got the financial system sick, this next thing you’re about to hear about, helped spread the sickness into an epidemic. These are "credit default swaps." Alex explains.

And Act 4:

Act Four. What's Next?

Ira and Adam answer the question: Was the $700 billion bailout bill signed into law today a good idea or a bad one?

What Does Health Care Have to Do With Economic Recovery?

Japan went through a decade long recession the 1990s. Here is an article explaining some things that we can learn from their experience:


Japan’s Big-Works Stimulus Is Lesson

Here are some quotes from the article I found particularly interesting:

...Japan's experience suggests that infrastructure spending, while a blunt instrument, can help revive a developed economy, say many economists and one very important American official: Treasury Secretary Timothy F. Geithner, who was a young financial attache in Japan during the collapse and subsequent doldrums. One lesson Mr. Geithner has said he took away from that experience is that spending must come in quick, massive doses, and be continued until recovery takes firm root.

Moreover, it matters what gets built: Japan spent too much on increasingly wasteful roads and bridges, and not enough in areas like education and social services, which studies show deliver more bang for the buck than infrastructure spending...

And this:

“It is not enough just to hire workers to dig holes and then fill them in again,” said Toshihiro Ihori, an economics professor at the University of Tokyo. “One lesson from Japan is that public works get the best results when they create something useful for the future.”

What Does the Constitution Mean By "general welfare"?

This is a little bit of a side issue, but it relates to the administrations efforts to institute health care reform. I was curious about the argument that the federal government does not have the authority to make such reforms under the constitution. The argument is that anything that is not expressly authorized is not allowed. As such, the constitution would have to say something specific about health care for it to be in the purview of the federal government.

The counter argument is that they do have the authority under the general welfare clause of Article 1 Section 8:

The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;

This is a good article that explains the legislative and judicial history of this clause: SPENDING FOR THE GENERAL WELFARE

What's Going On?

This is an excellent, straightforward explanation of what happened to get us in the current situation:


The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

What's AIG and What's Its Role in This?

American International Group Inc.
AIG: NYSE; Financials/Insurance - Multiline

American International Group was the largest insurance company in the United States before it suddenly collapsed in September 2008 under the weight of bad bets it made insuring mortgage-backed securities. The company was bailed out by the Federal Reserve, but even after that $85 billion infusion, losses continued to mount and in November the Treasury announced a new rescue package that brought the total cost to $150 billion. Read More

From Propping Up a House of Cards in the NY Times:

When you start asking around about how A.I.G. made money during the housing bubble, you hear the same two phrases again and again: “regulatory arbitrage” and “ratings arbitrage.” The word “arbitrage” usually means taking advantage of a price differential between two securities — a bond and stock of the same company, for instance — that are related in some way. When the word is used to describe A.I.G.’s actions, however, it means something entirely different. It means taking advantage of a loophole in the rules. A less polite but perhaps more accurate term would be “scam.”

The article goes on to explain how AIG used its AAA rating to package, sell and insure credit-default swaps to financial institutions all over the Western economy.

Later on in the article:

Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would “blow up,” and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful.

Why US keeps backstopping a flattened AIG

From an article in the Christian Science Monitor:

After Lehman Brothers failed in September, the financial markets froze up, causing interest rates to jump despite vigorous efforts by central bankers worldwide to keep credit flowing. Would the same thing happen – or perhaps something worse – if the US let troubled insurance giant AIG (American International Group) fail?

Yes, is the reply from the US Treasury and the Federal Reserve, which added another $30 billion commitment to AIG on Monday. This increases taxpayers’ pledges to the company to $180 billion – about the same amount to be spent this year under the just-passed economic stimulus package. It is the fourth time Uncle Sam has had to backstop the company.

“AIG by itself is not important, but it is intertwined in so many other aspects of our financial life and so many people rely on it in one form or another,” says Stan Collender, a partner at Qorvis Communications in Washington. “If AIG were allowed to go down, it could lead to possibly a global depression."

What are Fannie Mae and Freddie Mac?

From Q&A: Fannie Mae and Freddie Mac on Aljazeera.net:

Fannie Mae was created by the government in 1938 to guarantee mortgage loans made by private banks.

After the Great Depression, which was characterised by bank failures on the one hand, and substantial losses of income on the part of large number of households on the other, the private mortgage market was providing mortgage loans to too few households.

The objective of the Roosevelt Administration was to restore widespread homeownership, which had become almost an ideology in the United States from early on in the twentieth century.

Thirty years later, in 1968, the government freed Fannie Mae from its control and privatized it with a Congressional charter. It became just like any other bank, except that it still did not make mortgage loans directly to the public. Instead, it bought up what is called the "secondary" market - the mortgages which had already been made by the private banks.

Two years later, in 1970, the US government created Freddie Mac, an exact duplicate of Fannie Mae. The reason behind a second institution was that high economic growth of the 1960s had led to rising incomes and the resulting widespread homeownership made just one government sponsored mortgage institution, namely Fannie Mae, unappealingly, if not scarily, large.

Both Fannie Mae and Freddie Mac have been private enterprises since then, up until September 7, 2008.

What led to its takeover by the federal government?

From The People Responsible for Fannie Mae and Freddie Mac on Fool.com:

It was a wise man who noted that the only corporate structure more insidious than a government-sponsored monopoly is a government-sponsored and investor-owned monopoly. In the end, as Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) have now so painfully proved, trying to serve the master of public policy while generating returns for investors will lead to disaster.

Fannie and Freddie collapsed because they were part and parcel of the widespread gross financial misconduct that has taken place in the United States over the past decade. It's easy to miss this fact, but the reality is that too many people were making too much money pumping up the housing market. In 2005, the Office of Federal Housing Enterprise Oversight (OFHEO), the erstwhile regulator of the two, attempted to limit their use of off-balance sheet entities to groom earnings. In the end, it didn't, because, as one reform-minded politician admitted, Congress was afraid of undermining the housing boom.