Nobel Prize-winning economist Joseph Stiglitz does not like the Geithner plan:
“The Geithner plan is very badly flawed,” Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong.
U.S. Treasury Secretary Timothy Geithner’s plan to wipe up to US$1 trillion in bad debt off banks’ balance sheets, unveiled on Monday, offered “perverse incentives,” Stiglitz said.
The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.
“Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”
Even if the plan clears banks of massive toxic debt, worries about the economic outlook mean banks could still be unwilling to make fresh loans, while the prospect of a higher tax burden to pay for various government stimulus plans could further undermine U.S. consumers, he said.
Nobel Prize-winning economist Paul Krugman has already come out strongly against Geithner’s plan. Today he responds to Larry Summers:
Larry is a first-rate economist with a job to do, and I wish him luck in it. He understands what I’m saying, of course, but he’s doing his best to support the official line.
That line now goes like this: first, the Geithner put is just “one component of the plan” — although the other components are invisible to the rest of us, now that the stress test seems to have been downgraded to irrelevance. Second, rather than defending the large subsidy the plan creates for anyone who buys troubled assets, administration officials tout the virtues of markets in general, and say, hey, this creates a market, so it must be good.
It’s a bit disappointing to see the Obama administration engaging in this sort of market-worship — hailing markets as a Good Thing in themselves, rather than as an often but not always useful means to an end. But I have reason to think that unlike the Bushies, they don’t really believe it; it’s just politics. Which is actually better than having genuine market fanatics running things, I guess.
Not all Nobel Laureates are dissing the Geithner plan. Michael Spence, who shared the Nobel Prize with Stiglitz, said “it could work”, although he called it a “little complex to implement”:
“This program is crucially dependent on the private sector as participants and price setters,” said Spence, 65, who shared the Nobel Prize with George Akerlof and Joseph Stiglitz for a theory that found some government intervention can make markets more efficient. “It could work,” Spence said in a telephone interview yesterday.
While Spence, a Stanford University professor and former business-school dean, has more confidence in Geithner, even he isn’t positive the Treasury secretary can pull it off.
The Treasury plan “is a little complex to implement,” Spence said. “I assume the Treasury has done its homework, and has people lined up” to commit private capital to Geithner’s public-private partnerships, he said.
No word yet on whether Hank Paulson likes Geithner’s plan.