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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Geithner Plan

Posted by WARREN MOSLER on March 25th, 2009


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This is what happens with a government that doesn’t know how the monetary system works and thinks it needs private capital participation:

Geithner Tempts Investors with Loans, 25% Returns

by James Sterngold

Mar 24 (Bloomberg) — The U.S. government’s plan to rid banks of toxic assets may attract investors with financing that helps generate returns as high as 25 percent. The Public-Private Investment Program would encourage the purchase from banks of certain securities backed by mortgages and other assets, as well as whole loans. Loans from the Federal Reserve and Federal Deposit Insurance Corp. debt guarantees will bring out the bidders.


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7 Responses to “Geithner Plan”

  1. RSG Says:

    Warren, The weak 5-year treasury auction sold at 1.849% vs. expectations of 1.801% (indirect participation was 30% vs. 50% recently) and the failed UK Auction (UK tried to auction 1.75bln 4.25% 2049, but only received 1.62bln in bids) has sparked concerns about gov’t ability to borrow. what are the dynamics of a weak or failed auction and what are the underlying implications?

    Reply

    RSG Reply:

    i assume it’s just a supply/demand issue for that paticular secuity.

    Reply

    warren mosler Reply:

    right.

    first there is no economic imperative for the tsy to sell secs in order to spend. spending is not revenue constrained.

    tsy secs function to support term rates at levels higher than otherwise. so selling 5 year notes serves to keep 5 year tsy rates higher than other wise.

    so a failed auction would be one that failed to keep rates high in that sector meaning more secs were in order, if the analysts understood how the monetary system works

    Reply

    RSG Reply:

    “so a failed auction would be one that failed to keep rates high in that sector meaning more secs were in order”

    more securities were in order? but there was no demand for more securities

    Reply

    warren mosler Reply:

    just keep offering them at higher rates until rates have reached your target. then you will have succeeded in creating the higher rates which is the goal. the goal is to support rates at higher levels, not to sell secs per se.

    of course my goal would not be to push up long rates, so, like Goodhart, I would suspend all sales of tsy secs with maturities over 3 months, and might suspend the shorter term ones as well shortly thereafter.

  2. torjan horse Says:

    Congressman Ryan Evans was really angry today, he wanted to cap ownership of our debt by foreigners at 26% – currently he said they own 50% or so. I think he genuinely believes our debt holders can dictate the US government. When I remember chinese donations to the clinton political campaigns through buddhist temples and the leakage of all kinds of our intellectual property to them, perhaps he has a point, but I can’t help remember the old saying – if you owe the chinese 1 million dollars, you got a problem, but if you owe them 100 trillion, the chinese have the problem. How exactly does the congressman think that legislation was supposed to play out? Were we to go to the foreign debt holders and tell them they have to give back 25% of our debt because now there are new laws in the USA saying they can’t own more than 26%? Huh?

    Reply

  3. Matt Franko Says:

    From the UST PPIP release: “…if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases – along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.”
    As has been discussed here before, Govt officials do not want to be accused of “overpaying” in hindsight several years from now so they will take on partners to share the blame if it goes badly (some CYA at work here).
    Resp, Matt

    Reply

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