Public Private Investment Program (i.e. the Geithner Plan)

[tectonic_drift]

Cross-posted to policyresearch

Against

Paul Krugman is against the Public Private Investment Program (PPIP). I tend to agree with him mostly because the current plan subsidizes the private investor a lot. This description by Nemo explains the mechanics well.

ForThe rationale for the plan is that we need to subsidize the private investor to get

Comments

[engelhardtlm1]

My thoughts:

Let the companies that are going to fail, fail. Counterparty risk is a very real form of risk, so I see little reason that we should bail people out for not accurately estimating it - in fact, doing so just perpetuates incentives for the underestimation of such risk. Yes, it's possible that a lot of financial institutions would have problems - perhaps even go under. But, if we believe that these financial institutions are providing a valuable service, then similar institutions will arise to take their place. As long as the government doesn't make it harder than necessary to get these new institutions started, the process - though certainly not "smooth" - shouldn't take too too long.

All that said, Krugman is right that the FDIC's non-recourse loans are effectively a contingent subsidy that will lead to prices on this newly created "market" being significantly higher than they would be if the purchase of these assets was not subsidized... which makes it far more likely that the taxpayer is going to be eating losses.

[tectonic_drift]

Thank you for your input. The irony here is that my obvious hesitation to be forcefully against the plan stems from a different kind of risk aversion:

I am apprehensive about a lot of social-economic upheaval from bank collapses…but more apprehensive about skewing the price of these assets so much and the precedent we’d set for “bailout”.

Structural adjustments are part of capitalism. As you allude to--survival of the fittest.