Toxic Asset Rip-Off
That’s how analysts describe the trillion-dollar toxic-asset buy-up program proposed this weekend by the Obama Administration: “the president is putting forth his idea to have the Treasury become the new AIG. In order to get hedge funds to buy up toxic debt, Obama is proposing that the Treasury provide loans up front and insurance against potential losses on the back end. It’s what Paul Krugman called ‘heads I win, tails the taxpayers lose.’ By the way, it may cost another $1 trillion.”
The Treasury Secretary claims taxpayers won’t lose a full trillion, because the assets aren’t as worthless as their current market prices suggest. But if that’s true, why does he continue to insist on federal accounting rules that force banks to value their assets at the current depressed market prices? Either the accounting rules are right — in which case taxpayers will end up losing a trillion dollars — or they are wrong, amplifying financial panics — in which case the rules should be repealed, so that banks, not taxpayers, will be able to take the risk of holding the assets. (If these accounting rules, known as “mark-to-market” accounting, had been in place in the late 1980s, “every major commercial bank would have collapsed,” wiping out the economy).
The above is the cost of getting the government involved in issues the private sector should handle. Of course letting the private sector handle this is how a politician who believed in Capitalism would lead.
Meanwhile Obama’s former nominee for Commerce Secretary, Sen. Judd Gregg, just admonished Obama over his budget proposal:
This translates to a debt-to-GDP ratio that we have not seen in this country since the end of World War II, when we were trying to pay off war debt,” he said. “If you take all of the presidents from George Washington to George Bush, and add up all of the debt they put on the books of the American people, President Obama’s plan adds more debt than that.”
Sen. Mitch McConnell, standing with Gregg, warned Democrats against passing the budget along party lines and using budget reconciliation to pass sweeping new programs. “If you do it with no bipartisan buy-in at all, then you own the whole thing.”
Oh, they own it….all of it.