Yes It Will – No It Won’t
Will the plan promoted by Treasury Secretary Timothy Geithner to purchase toxic assets held by the financial industry work? Well that depends on who you ask. Even two Nobel prize winners in economics can’t seem to agree. Michael Spence, co-winner of the 2001 Nobel Prize in economics says it will (or at least it can) whilst Paul Krugman, the 2008 economics laureate says it cannot.
So who is correct? The issue seems to revolve around whether you believe that private investors will want to partner with the government. As we understand it, the plan is aimed at financing $500 billion to $1 trillion in purchases of illiquid real-estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds. It also will rely on Fed financing and guarantees from the Federal Deposit Insurance Corp. According to Bloomberg.com, “A crucial question is whether private investors can stomach potential threats and scrutiny from Congress, whose move last week toward taxing employee bonuses may drive bidders away, said Carnegie Mellon University professor Allan Meltzer, 81, author of a history of the Federal Reserve.”
So we’ll see.