Economics

Obama: We're Gonna Need a Bigger Boat

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In another sign that the phrases "$1 trillion" and "new government powers" have lost their ability to shock, the Obama administration has hatched the next phase/new wave of bailouts. Some gory details:

[The plan] will create a new government entity, the Public-Private Investment Program, to help purchase as much as $1 trillion in toxic assets on banks' books. […]

[It] will give the government new resolution authority to take over troubled institutions that would pose a threat to the entire financial system if they failed. […]

Under the new powers being sought by the administration, the treasury secretary could only seize a firm with the agreement of the president and the Federal Reserve.

Once in the equivalent of a conservatorship, the treasury secretary would have the power to limit payments to creditors and to break contracts governing executive compensation, a power that was lacking in the AIG case. […]

The initiative will seek to entice private investors, including big hedge funds, to participate by offering billions of dollars in low-interest loans to finance the purchases. The government will share the risks if the assets fall further in price. […]

The regulatory plan is also expected to include a major change that gives the Federal Reserve more powers to oversee systemic risks to the entire financial system.

One key question that won't be answered by this or the next three bailouts, is: How big is "too big to fail"? Or conversely, how small is "big enough to get bailed out"? Consider that TARP I, which was authorized specifically for financial institutions, is now being applied to auto-parts manufacturers. "Systemic risks" are in the eye of the beholder; the beholder in this case is an explicitly political animal, ready and eager to turn momentary spasms of public anger into ridiculously self-defeating law, and now the animal wants still more unprecedented power. Seems to me there might be some problems with that set-up.

Reason on the bailouts here.

NEXT: Really Not a Good Idea for Obama To Be Talking About The "Best and the Brightest"

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  1. Our economy has a fever and removing the toxins is the cure.

  2. We are so fucked.

    Oh and what CEO or Board of Directors is so desperate that they’d go into partnership with Obama/Pelosi/Reid if there is a need for a scapegoat their income is confiscated?

  3. [It] will give the government new resolution authority to take over troubled institutions that would pose a threat to the entire financial system if they failed.

    So they will have the authority to take over a company, regardless of whether the company wants help or not? What the Fuck?

    Since I’m at work and can’t RTFA, can someone clarify?

  4. Taktix?,

    Since I’m at work and can’t RTFA, can someone clarify?

    Some companies want to help willingly, some want to be selfish and horde money. Obama wants everybody to help and is just trying to make sure they help to the best of their ability.

  5. Can someone else clarify?

  6. Treasury’s toxic asset plan could cost $1 trillion

    Mar 22, 5:03 PM (ET)

    By MARTIN CRUTSINGER

    WASHINGTON (AP) – The Obama administration’s latest attempt to tackle the banking crisis and get loans flowing to families and businesses will create a new government entity, the Public-Private Investment Program, to help purchase as much as $1 trillion in toxic assets on banks’ books.

    The new effort, to be unveiled Monday, will be followed the next day with release of the administration’s broad framework for overhauling the financial system to ensure that the current crisis – the worst in seven decades – is not repeated.

    A key part of that regulatory framework will give the government new resolution authority to take over troubled institutions that would pose a threat to the entire financial system if they failed.

    Administration officials believe this new power will save taxpayers money and avoid the type of controversy that erupted last week when insurance giant American International Group paid employees of its troubled financial products unit $165 million in bonuses even though the company had received more than $170 billion in support from the federal government.

    Under the new powers being sought by the administration, the treasury secretary could only seize a firm with the agreement of the president and the Federal Reserve.

    Once in the equivalent of a conservatorship, the treasury secretary would have the power to limit payments to creditors and to break contracts governing executive compensation, a power that was lacking in the AIG case.

    The plan on toxic assets will use the resources of the $700 billion bank bailout fund, the Federal Reserve and the Federal Deposit Insurance Corp.

    The initiative will seek to entice private investors, including big hedge funds, to participate by offering billions of dollars in low-interest loans to finance the purchases. The government will share the risks if the assets fall further in price.

    ***Edited for length and platitudes***

  7. LOVE the headline.

  8. Free markets are the disease, and we are the cure.

  9. Frog Prep these oafs!

  10. We got any fiddle players here? I’m starting to smell smoke.

  11. Having a net worth of approximately nil means that I can enjoy this show in all its absurd postmodern glory. Fiscal policy as performance art, yo.

  12. Having a net worth of approximately nil means that I can enjoy this show in all its absurd postmodern glory.

    One word, Warty: Inflation.

    Inflation impoverishes everyone. Every new announcement by Our Masters drives another nail in that coffin.

  13. Yeah, RC, but I’m bigger than most people and I have more guns. I’ll just become a slaver or something. I’ll be fine.

  14. Public-Private Investment Program – PPIP. Piss Poor Investment Plan must have already been taken.

    Warty, we are paying slavery reparations right now. Please don’t make it happen again.

  15. Is there any online place to reputably get gold coins or another physical form of gold?

  16. Oh My God, the building is burning. Here quick we’ll smother the fire with all this money, just keep tossing it on, it will eventually go out…

  17. OK, so the Federal government spends decades punishing small businesses through ridiculous taxation while subsidizing huge businesses like AIG through corporate welfare programs. Then, when these overfed goldfish become “too big to fail”, at the small fish’s expense, the government HAS to step in to solve this problem it claims was caused by evil free markets.

    Has anyone heard of something called “M?nchausen Syndrome by Proxy”?

  18. “Our economy has a fever and removing the toxins is the cure.”

    Yes – and government is the toxin.

  19. Here’s another key question that won’t be answered by this or the next three bailouts: What is the actual market-clearing price of this asset?

  20. Since I’m at work and can’t RTFA, can someone clarify?

    In a word: Putin.

  21. “OK, so the Federal government spends decades punishing small businesses through ridiculous taxation while subsidizing huge businesses like AIG through corporate welfare programs. Then, when these overfed goldfish become “too big to fail”, at the small fish’s expense, the government HAS to step in to solve this problem it claims was caused by evil free markets.”

    Reminds me of the school bully who punches a smaller kid and taunts, “Stop hitting yourself. Stop hitting yourself.”

  22. Is there any online place to reputably get gold coins or another physical form of gold?

    Many, many scams out there. I would recommend finding a local dealer (I can’t imagine having my gold shipped to me), but you will probably have to pay a premium to take physical delivery no matter what.

    One option, if you are looking at significant quantities, is to buy a futures contract and let it mature rather than rolling it over. At that point, you are entitled to physical delivery of your gold, although I’m not sure how the actual handover of your bullion would occur, or what form it would take.

  23. He said he was only taxing the rich, HAHA. He has taxed everyone you know, will ever know, and all their children and grandchildren!!!

  24. Under the new powers being sought by the administration, the treasury secretary could only seize a firm with the agreement of the president and the Federal Reserve.

    Phew! I was worried, for a minute; that sort of power might be abused.

  25. Every day under Obama is a day more absurd than the previous. Numbers are being thrown out that are simply incomprehensible they are so large. One TRILLION to buy worthless mortgages? Fuck that! If no one wants to buy the mortgage, give it to the homeowner!

    I think that freak lightning strike last year I got struck with threw me into Bizarro America.

  26. Once in the equivalent of a conservatorship, the treasury secretary would have the power to limit payments to creditors

    The longstanding rule of law in this country says that creditors have first dibs on the assets of a failing company. If the government is going to take over and give itself first rights to company assets, a right ordinary equity holders do not have, what creditor is going to lend money to a company that is covered by this law? It will destroy the finance industry.

  27. If the government is going to take over and give itself first rights to company assets, a right ordinary equity holders do not have, what creditor is going to lend money to a company that is covered by this law? It will destroy the finance industry.

    Or at least, there will be a ‘takeover risk premium’ in dealing with these large institutions. One way or another, it will be priced into the market. Along with new risk premiums that judges might cram down the mortgages securing the debt, the risk that the government will cap executive salaries, the risk that holders of debt will see its value inflated away…

    One of the reasons third world countries can’t attract investment is because they have too many of these sorts of risks (nationalization, civil strife, hyperinflation, etc).

    At best, the net effect of all these new controls will be to drive up the cost of capital in the U.S., causing major capital flight to any countries smart enough to maintain freer markets. Companies will start relocating head offices out of the U.S. or attempt to relocate wholesale to other countries.

    This then will be called ‘tax avoidance’, and new laws prohibiting capital flows will be passed, which will start eating away at international trade.

    That big infrastructure program? I think it’s paving the Road to Serfdom.

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