Geithner and Obama Fail Economics 101

Today, Treasury Secretary Timothy Geithner is proposing a new program that will allow banks and finance houses to sell upside-down mortgage-backed investments to a "private-public partnership" entity. In this deal, Geithner says that the private sector must take "risks." Of course, the public part of the "private-public partnership" is taxpayers.

Geithner must have failed Economics, or Geithner and Obama intend to blackmail the "private sector" and rip off taxpayers.

Banks can make loans only to the extent they have assets to back the loans. For years, banks made loans based on the present value of a bundle of mortgages. When the housing prices fell, the mortgages became less secure, and thus less valuable. As a result, the banks were losing asset value, and with their asset base value diminished, their ability to loan money was likewise diminished.

Geithner and Obama's proposed plan today has the stated goal of removing "toxic" assets off the books of the banks, so that they can start making loans again.

Here is the problem with that: the "toxic" assets are not valueless. Merely taking these assets off the books of the banks is not going to free up one nickel in available loan capital; in fact, it lowers it. The only way loanable capital is increased for these banks is if the “toxic” assets are purchased by this “private-public partnership” at greater than the present market value.

Do Obama and Geithner expect savvy private investors like hedge fund operators will pay greater than market value for “toxic” assets? Market value already factors in the “risk” Geithner wants the private investors to take, so who in their right mind would do so?

This might occur in two ways:

First, as a sweetener, the public part of the partnership - the taxpayers - could give interest-free loans to these private investors who would then purchase “toxic” assets. This means playing with house money and betting on the come. The assets may improve their value over time to cover or exceed the loan value, and if they don’t, you just bankrupt the entity receiving the loan and walk away. Either way, Geithner’s promotion to Treasury Secretary pays handsome dividends to his Wall Street buddies at the expense of the taxpayers.

Second, Obama could use the various regulatory arms of government to threaten/blackmail healthy financial institutions to purchase some of these toxic assets at greater than market value, and these institutions might do so chalking up the government shakedown as a cost of doing business.

While some of the first two options will undoubtedly occur, the biggest part of the “toxic” asset removal will be the third route: the public part of the “partnership” - the taxpayers - will buy the lion’s share of these bank assets. Thus Geithner and Obama (on your behalf, of course, since you don’t know how to spend your own money wisely) will own and control a solid hunk of the real estate market. And why would Obama seek to maximize that investment for the taxpayers when ACORN would like to use those houses for “underprivileged” families who just need a little hand up?

Under this plan, you would not just be paying other peoples’ mortgages; you would be buying their entire house for them.

Welcome to Obama’s Socialist Utopia.